The recent patch of growth is one of the slowest that China has experienced since the late 1990s. Although its GDP grew roughly 7.7% in 2013 is really high from a US perspective, China feels like it has slowed down. However, TIME argues that we should welcome this. TIME describes China as: “the economy was starting to resemble a breakaway train, chugging toward that unfinished bridge just over the horizon.” Previous posts discussed domestic debt piling up to risky levels and a financial sector talking on bigger risks.
President XI Jinping realized that China has to slow down. Unlike his predecessors, he did not like the idea of using the machinery of the state to pump up the growth. [which of course is easier for him to do after he’s ensconced in office] Xi wants to open up financial markets to improve the management of state-owned enterprises and expand the power of the private sector. President Xi argues that this will make the economy healthier and more market-driven, which will lead to more widely shared growth.
It is funny to say that slowing down is a good thing. However, it is necessary for all of us. China has the world’s second largest economy. The rest of the world will be affected negatively if China suffers from economic crisis. For now, slowing down is one of the best solutions.
Source: TIME
What (from Econ 102 or Econ 211) would we normally use as indicators that an economy is growing too fast? Are any of these suggesting China is growing too fast? What alternate indicators might suggest a future crisis? Again, what do these suggest for China’s case? Or are the other factors at play that are not macroeconomic in nature, or that are other than the standard macroeconomic ones?
I think there are several factors that indicate an economy is growing too fast:
the sudden rise in demand for consumer goods. If demand goes up suddenly, then prices go up, which will cause inflation. Another factor is that banks have incentives to extend more credit. Also, the central bank can possible lower interest rates. Isn’t this what is going on in China? Unemployment can be another indicator. I think although China has been growing at over 7 percent annually, firms hire too many people so that they are not efficient at all. They gradually fire people to become more productive but this leads to the problem of unemployment.
This is an issue that the US faced during the 1990’s and up until 2008. It turns out the sometimes the economy can grow too rapidly or is inflated. The US made the wrong call in letting the economy boom based on false value, and it looks as if China is wisely looking to not make this mistake.
It’s not clear the US was growing too fast – we didn’t have inflation. We did have one very large sector (finance) go haywire, which led to distortions elsewhere (too much housing investment).
Let me rephrase that: if one sector (say autos in China) is growing “too fast” under one or another standard, does that mean the entire economy is growing “too fast” and that policymakers (the PBOC?) should seek to slow growth for all other sectors? How can we separate microeconomic from macroeconomic issues? If there’s a housing bubble in China, is the response to slow growth for farmers and food vendors and car workers? (I have been in off-the-record meetings where senior Fed officials debated this topic prior to 2008.)
Check out my prior post on China’s growth rate: “China’s Growth Slowdown Reflects Sustainability, Realism” for more perspective on this topic–particularly regarding industries which are growing too quickly