Advertisement

Blog

Quit Worrying About China’s ‘Overheating’ Economy

China is producing more goods than anyone expected, and its people are paying higher prices at home than predicted, according to a report on MarketWatch. As with everything China-related, the world has immediately scrambled to figure out what this two-tenths of a percentage difference between predictions and expectations could possibly mean.

So far, not much. The specific numbers are that Chinese GDP was up 9.7 percent over the same month last year, while its Consumer Price Index (CPI) was up 5.4 percent over the same month. Analysts — that amorphous cloud of gamblers always quoted in these stories; people who seem to exist to make these sorts of errors so they can explain them away — apparently expected 9.5 percent for the GDP number and 5.2 percent for the CPI. They were 0.2 percentage point short on each.

The question for electronics manufacturers is whether the GDP number, which brings good news of a galloping Chinese economy, outweighs the worry embedded in the CPI number. The CPI number is scary to markets because it suggests Chinese prices are rising fast enough to create inflation.

As MarketWatch noted somewhat shrilly, the real issue is whether the Chinese central bank, fearing inflation, is going to raise interest rates at least once more this spring, which would be a fifth hike since last fall, and maybe again in the summer. If China raises interest rates, one effect will be to suppress demand by Chinese industry and consumers, cutting into sales and supply of raw materials like rubber, supply contracts with trading partners like Australia, and contracts for oil.

On the other hand, we've heard this all before. A decade or so into China's boom, the annual “Is China overheating?” stories have become a predictable part of the yearly news cycle, and they read nearly identically around this time each spring. Last year, Time Magazine asked if 11.9 percent economic growth rate for China in 2010 was too much (no, apparently, as this year China did even better and hasn't crashed yet). Businessweek had asked the same question four years earlier, in 2006. Still no crash.

It's conceivable, of course, that the answer then, and now, was always “yes,” and that China has been consistently overheating. And that the Chinese government has gotten good at managing that. And that electronics producers, rather than panic, can play ball with Beijing each year, and manage what seems like a steady boom.

For electronics manufacturers, price rises within China could affect not just labor costs, which have risen sharply enough to cause some manufacturers to move elsewhere in Asia, but also the cost of electricity, transportation, fuel, and the like. So far, that hasn't caused any apparent reaction among investors in companies doing business in China.

Stock markets across the region fell on the news of the CPI report. But not much — and so far, it looks like the risk of inflation spooks everyone way more than the risk of higher interest rates.

So far, it looks like the time to panic will be when your iPad 2 doubles in price. We’ll let you know.

7 comments on “Quit Worrying About China’s ‘Overheating’ Economy

  1. SunitaT
    April 19, 2011

    “China has been consistently overheating. And that the Chinese government has gotten good at managing that”

    Marc,

     What tools are available to the Chinese government to stop inflation while at the same time preventing unwanted real appreciation of the yuan ?

  2. Marc Herman
    April 19, 2011

    Right, that's the question driving the current concerns. The expectation seems to be that China will keep raising rates into the summer, http://imarketnews.com/node/29648, and that the currency, contrary to public statements, will be allowed to keep creeping up. What I haven't read anywhere is someone reconciling the concerns about overheating, with the parallel concerns about wage increases causing China to lose investment to its neighbors. I'd be curious to know whether someone thinking of opening a factory in China right now is more concerned by medium- and long-term financial trends, or the political environment, internet privacy shenanigans, access to resources like base metals and food, for example. Any thoughts?

  3. hwong
    April 19, 2011

    What I am most concerned about is that with the growth in China, it is kicking up costs for alot of things for us in the U.S. For example, I just went to the grocery and bought a carton of organic 2% fat milk. It costed me $6.99!  I know. I know. You're going to say that it's only a tiny fraction of our disposable income. But still, it's crazily too high. I remember this was only $2.99 10 years ago. more than 100% increase. Especially in the last few months when things are heating up even more. Alot of fresh vegetables have increased 40% in price.  Thanks to the increasing demand of other countries, our salary  is not keeping up with the inflation.

  4. Marc Herman
    April 19, 2011

    That is some pretty expensive milk you've got there. What's making you think the price hike for foodstuffs in the US is a result of Chinese economics?

  5. Barbara Jorgensen
    April 19, 2011

    You are right, Marc, we've been worrying about this for more than a decade. Some of the predications have come home to roost–higher wages, for example—but we are far from the need to panic over China's economy. On the grand scheme of things, the US debt and the Middle East are higher on my “global things to worry about” list than China's overheating

  6. Jay_Bond
    April 20, 2011

    This is a debate that has been going on for a decade now and seems like there is no end in sight. It seems like everybody is just waiting for China to fall into a tailspin and bring things back down to a more manageable pace. What if China doesn't slow down? What if Beijing can continue to manage the rising numbers without failure? Is there something they might be doing that our own government should be looking at?

    I myself and much more worried over our countries increasing debt and nonstop spending. Couple that in with all the issues going on in the Middle East and now we have something that can affect many people on a global scale.

     

  7. Anna Young
    April 21, 2011

    The focus on China has been for decades, yet China has managed to contain and conductor its affairs, may be not in an acceptable manner – its economy is still booming. Why should I worry about China?   China has emerged stronger so far, year in year out its still standing.

    I think I'll worry more about the global crises and its consequences.

     

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.