China Economics


  * China's economy "weathered" the global downturn better than most economies. In fact, the country’s Gross Domestic Product expanded by an average 8.45% in 2009, the fastest in the world. Yet, the astonishing recovery was supported by a vast fiscal stimulus and loose monetary policy. And looking ahead, China’s economy may overheat and bring inflation to elevated levels thus hampering future growth.

Indeed, China’s growth in 2009 was largely a result of 4 trillion yuan stimulus package directed mostly to infrastructure projects and lending. For example, in December only, China's wide M2 measure of money supply and fixed asset investments grew almost 30% year on year. On the other hand, although putting a lot of cash into an economy during a slowdown may stop job losses, boost confidence and stimulate growth, can also create excess capacity and boost imperfection across the financial system.
In addition, China has been keeping the value of its currency yuan pegged to the US dollar at very low levels.  And with greenback having depreciated significantly in 2009, the trade-weighted value of Yuan also declined, making foreign goods more costly in China. Adding to that already high food prices, a result of severe weather conditions in northern regions, and inflation may get out of control. So, under these circumstances there is a big pressure on wage growth and companies are likely to raise prices to cover costs which will depress spending among Chinese consumers.

  * Surging China recently overtook Germany to become the world’s leading exporter and will soon eclipse Japan as the second-largest economy in the world. Although China has received a great deal of praise for its response to the financial crisis and the country’s economic rise contributes to its global power, there are fears that bubbles and growing economic imbalances could constrain future growth.
What it did was it took China from having the highest investment rate—probably in recorded...