China’s engine keeps accelerating

Alisa Roth Jan 25, 2007

TESS VIGELAND: If only Ford could model the performance of this next engine.

China’s been serving as one of the world’s major economic engines for a couple of years now. But 2006 was notable, even by the country’s own recent standards.Beijing reports today that the economy grew by 10.7 percent last year. That’s a total economic output of almost $2.7 trillion.

But there is such a thing as too much of a good thing. And China’s been trying hard to slow things down.

Marketplace’s Alisa Roth looks at why it might not be worth the trouble.

ALISA ROTH: This is the fastest growth in China in more than a decade, and economists are guessing the crazy speed will continue. Which means China could beat out Germany to become the world’s third largest economy by the end of the year.

That’s good, isn’t it?

Yes, says the University of Michigan’s Kenneth Lieberthal. Up to a point.

KENNETH LIEBERTHAL: Rapid growth on balance is good for keeping overall stability, but if the economy should go into a tailspin in reaction to overheating, or if there should be very rapid inflation or something like that, then things could potentially get out of hand on the social unrest side.

Inflation is already an issue. The price of consumer goods hasn’t really gone up much. But share prices on the Shanghai stock market last year were gangbusters — even though the companies weren’t doing especially well. And real estate prices in many cities are very high, too.

China’s been trying to slow things down. The central bank raised interest rates twice last year. Earlier this month, it told commercial banks to set aside more money for reserves.

Nicholas Lardy is an economist at the Peterson Institute for International Economics. He says it’s about quantity over quality.

NICHOLAS LARDY: The main underlying concern is that when you grow so fast, maybe the efficiency of growth is declining a little bit. It’s taking a lot of investment to generate the growth. There is evidence of excess capacity in some sectors.

Lardy says China’s economy would be more efficient if it reduced investment and increased consumption. And a more efficient economy would also grow more slowly.

A big problem, he says, is that the country’s lack of social service infrastructure means Chinese consumers are reluctant to let go of their cash. China has the highest savings rate in the world.

In New York, I’m Alisa Roth for Marketplace.

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