China- Overheated Ready to Burst?

China is racing with rapid economic growth due to its surging exports and robust growth in investments. China’s real GDP soared to a 12 year high of 11.9%, that accelerated from11.1% in Q1’07.Recent increase in Chinese private consumption growth has been fuelling both the economy and the already overheated stock market-the Shanghai SCI-300, that soared 168% this year. This has brought in renewed concerns about stock market bubble burst that might prove dangerous for the Chinese economy. Beijing has been confronted with twin problem, one to cool down the economic growth without dampening investor sentiment, and get hold of the bubbling stock and asset price hike that is fuelling inflation at record high 6.9% in 9 year history. This ongoing inflation problem in China prompted authorities PboC(People’s Bank of China) to increase interest rates thrice, now 7.25%, which is justified.

China’s inflation has been driven by high food prices and a shortage of pigs. China’s red hot economy is also adding to the price pressure and a chance of inflation spiking up higher cannot be ruled out in Q1’08. It’s a big challenge for an economy of this scale to sustain the current growth rate, though well supported by a strong growth in industrial output and buoyant money supply. It is also feared that China might be exporting the inflation too, but a data shows that this might not happen as China’s food export constitute only 3% of its total export. Government officials has sought regulation of food prices to tame the inflation from becoming a troubled one(runaway inflation). Without drastic moves from Beijing, it is unlikely that it could have much impact on the current scenario, so slowdown is unlikely as per our forecast. It is also true that China being a mojor exporter to the US, an US economic slowdown would hurt the Chinese export substantially. Also, China has to counteract ‘Made In China’-at stake and raise its product safety level as a result of toxic chemicals found in Chinese export, that have been reported to have killed several people and animals in Mexico and some other elsewhere. Beijing’s challenge in product safety calls for a swift action, though Chinese officials have taken drastic steps to counteract this problem.

Key Risks to Chinese Economy:

· Overactive policy moves to cool the economy
· Shanghai stock market bubble burst
· US slowdown
· High Unemployment rate
· Concerns about working conditions
· Quality Control of Chinese export.

Positive Indicators:

· Rapid and prompt action from the Beijing authorities in addressing quality issues
· Cautious and calculated approach to cool the economy
· Development of inland based component business activity
· Bustling business activity and investment growth
· Increased consumerism
· Beijing Olympics

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