China's Economy in 2007/2008: Coping with Problems of Runaway Growth

John Wong

China & World Economy, 2008, vol. 16, issue 2, pages 1-18

Abstract: Fuelled by high domestic investment and rapid export expansion, China's economy grew by 11.4 percent in 2007, the highest increase since 1994 and the fifth consecutive year of double-digit growth. Such spectacular growth performance is unprecedented in the world s economic history. However, the Chinese Government is again worried about a possible "hard landing" for the economy, as no economy can sustain very strong growth for extremely long period without overheating. Cracks in China s economy are indeed emerging. The consumer price index shot up to 6.9 percent in November 2007, the highest level in a decade, with the annual inflation for 2007 rising to 4.8 percent, well above the governments "comfort level" of 3 percent. This prompted China s top leadership to declare that reducing economic overheating and curbing inflation would be the top policy priorities for 2008. To contain such cost-push inflation, the government has to tackle its root causes, such as excessive liquidity, which is caused by the undervaluation of the renminbi, which in turn is attributable to China s chronic external and internal macroeconomic imbalances. High growth is likely to continue in 2008, at around 10 percent, with inflation of 5-6 percent expected, despite the anticipated tighter macroeconomic control measures and the more troubled external economic environment (e.g. the expected US economic slowdown). Regardless, China s fundamental problems associated with runaway growth will largely remain. In addition, if the US economy slips into a serious recession, the Chinese economy will not be able to decouple from it and escape unscathed. Copyright (c) 2008 The Author.

Date: 2008

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