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

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.