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Is the Chinese Economic Boom Over?
February 1, 2008

There was an interesting editorial on the Chinese economy in the January 30 New York Sun.   The piece, entitled “China’s Boom Is Over” was written by Jun  Zhang, Director of the China Center for Economic Studies, Fudan University in Shanghai.

It’s a strong analysis of the rise of inflation in China just as the western economies are slowing down.  Here are excerpts:

The problem is that, until now, the major cause of inflation has been rapidly rising manufacturing costs, and there is no sign of a slowdown in energy and raw material prices. Moreover, a new labor law and income policies will further increase workforce costs. As a result, . . . inflation could spread.

. . . [I]ncreasing pressure from growing labor costs will force enterprises to lower their profit expectations and cut costs, negatively affecting output growth and employment in the short run.

It will be difficult to ease these inflationary pressures this year. International commodity prices will continue to rise, increases in domestic labor costs and prices of non-tradable goods cannot easily be stemmed. . .and asset inflation will persist. All these factors will push inflation above the 2007 level.

With export performance also set to slow, owing to the economic downturn in America, employment and growth could be weakened further, which implies mounting pressure on China's government — and thus on the fiscal deficit, creating another source of inflationary pressure. And, once an inflationary trend emerges and economic growth slows, the steady-as-you go pattern to China's decade-long boom will be over.

It is notable to see this kind of sober assessment on the Chinese economy from a Chinese economist.  All of us who are dependent upon the Chinese and American economies need to keep a close eye on this developing situation.

Posted by Richard Gottlieb on February 1, 2008 | Comments (0)