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Since 2008 – Progress Through Politics

Is China's Economy Overheating?

By: inoljt,

Much interest – and muted apprehension – has been focused on the rapid growth of China’s economy. The Great Recession barely put a dent on the country’s continuing expansion, in stark contrast to the troubled economies of the First World.

Yet now an interesting thing is occurring; one hears murmurs about weakness in the Chinese economy, murmers which were not heard last year.

More below.

Analysts are starting to advance the possibility that China’s economy is overheating. This is based upon economic indicators such as rising inflation (a classic sign of an economy running too fast).

Perhaps the most widely held view is that China faces a property bubble, whose bust would do quite a bit of damage to the economy. The New York Times, for instance, has written several articles examining excesses in China’s property boom. One article talks about a city named Ordos in northeastern China, full of recently built apartments that sit empty of residents. Such stories strongly recall tales during America’s property bubble, of empty suburban lots built around cities like Phoenix and Las Vegas, founded on the confident assumption that prices would keep on rising forever.

To be fair, there is a rationale for the speculation in Ordos. Despite its economic success, China has a lot of room to grow. Per capita income in China is still below that of Jamaica, for instance. So the new houses in Ordo will be filled, eventually, as poor peasants migrate to the cities.

Another article in the Times describes the building boom in Hainan Island – something that is harder to defend as economically rational. The Chinese government is apparently hoping to make the place a tourist destination, and such plans have set up an orgy of new construction. It is not immediately apparent, however, why Hainan Island is a better tourist spot than anyplace else in the world. In ten years its numerous golf resorts may well be languishing in red ink. The Hainan Island boom constitutes a strong indication of a property bubble.

China’s government seems to be recognizing these signs; the official rhetoric has shifted to cooling down the economy. Recently China’s central bank surprisingly raised interest rates in an attempt to do just that.

What would a property bust in China look like?

Well, China has actually had a previous property boom go awry. This was in the 1990s, and it may have temporarily lowered growth rates from ~12% to ~8% (although that bust apparently had little effect on the average Chinese person). The last time China had non-Chinese growth rates was in 1989 and 1990; the last time it had negative growth was during 1976, the year Chairman Mao Zedong died.

Given the political turmoil that occurred on both dates, a bad enough property bust might spark similar unrest. On the other hand, China’s government probably has enough domestic credibility to weather even negative economic growth. Moreover, the country’s economy probably has enough steam – the percentage of GDP in investment and savings is unparalleled in modern history – to continue growing at >6% per year even were such a bust to occur. It would take quite a shock to throw the economy off from its current upsloping course.


  1. Yes, they have been growing very fast for the last couple of decades. But that growth is quite misleading. They’ve grown so fast because of where they started. In 1980, the Purchasing Power Parity rating for China vs the U.S. was 2.04%. Today, that figure is 15.9%. That’s a tremendous gain, but still just a fraction of people in the U.S. The Chinese GDP is only 40% of the U.S. GDP. And China has 6X as many people.

    Half of Chinese workers are employed in agriculture, forestry, or fishing. Around 40% of all workers are in agriculture. There are still 100’s of millions of rural peasants living at a bare subsistence level. Most urban workers live in dormitories provided by their employer. They work long hours for low pay, although wages have been rising steadily and contribute to an annual inflation rate around 6%. Workers make between $100-$200 per month. At the higher end, they are becoming less competitive and are losing jobs to lower-income countries, like Vietnam.

    If labor costs in China rise much more they will become less attractive to companies that sell most of their goods in the U.S. The added cost of distribution and managing production on the other side of the world eats up most of the savings in labor costs. It won’t be long before we start seeing jobs come back to the U.S.

  2. The total tax burden for business profits is 63.5% of profits. And people complain about the U.S. rate of 35%. Here’s the biggest one. Sure makes what Michele Bachmann said sound pretty ignorant.

    Employer paid – Social security/housing fund contributions – 49.6% of profit.

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