B.

ANALYSIS
I. Definition of overheating economy
Overheating of an economy is defined as a phenomenon that occurs when its productive capacity is unable to keep pace with growing aggregate demand. It is generally characterized by an above-trend rate of economic growth, where growth is occurring at an unsustainable rate. Boom periods are often characterized by overheating in the economy.

II. Signs of overheating economy

In the history, some countries in the world dealt with overheating development of economy such as U !, India, Brazil, "ussia# !t the moment, $hina is facing with this situation. !lthough the government continuously insists that there is no sign of overheating growth in $hina, the inde%s indices are against. 1. Inflation $hina showed further signs of increasing prices as inflation rose to &.'( )O) nen chu thich )O)*year over year+ de moi ng hieu ,- in !pril versus &..( and consensus &./(. 0owever, much of the increase was related to increased food price inflation, but the overall trend of increasing prices has been flagged by the 1uarterly inflation e%pectations inde% *see the chart below+2 and lines up with the thinking and observations of most internal and e%ternal analysts which suggests the $hinese economy is showing signs of overheating. 3he near term outlook for inflation will most certainly be for continued rises in the near term, probably breaching the 4( target within a month or two. Bai nay ng ta viet ve inflation cua $hina vao thang . nen moi co du doan 4(

trong vong 5 hoac & thang toi. 6hung ma thuc te gio la thang 57 roi, va inflation cua 38 dat muc 4.9( tu hoi thang '. 6en to nghi minh nen doi cau dau cua doan nay thanh :$hina showed further signs of increasing prices as inflation rose to 4.9( )O) in !ugust which was 7.9( higher than government target; va cau cuoi thanh :probably reaching .( at the year of this year;.
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China's consumer prices rose at the fastest pace in nearly two years in August, as severe floods and unusually hot weather destroyed crops, driving up food prices. China's consumer price index rose 3.5% on year in August, compared with 3.3% in uly, the statistics !ureau said. "he figure mar#ed the $%th straight month the inflation has risen. &ood prices, a ma'or component of the consumer price index, rose (.5% on the year. "he nation's worst flooding in more than a decade has ravaged food crops and disrupted transport lin#s across the country, driving up the price of fruit, vegeta!les and meat.)

2. Retail sales <oving on, an indicator of $hinese domestic consumer spending, retail sales, increased a further 5'.9( )O)2 pulling back slightly from the seasonal peak earlier in the year, but beating consensus 5'.&( and previous 5'(.

3. Loan growth Incredibly topical, given concerns about $hinese overheating, and policy moves already taken to crack down on e%cessive loan growth, the stats for !pril will give no comfort for those with concerns of overheating. On a )O) basis this puts loan growth at &.( and lifts total loans above $6) .= trillion. o this is a positive in terms of its stimulatory effect on the economy, but a negative in terms of the inflation>overheating conte%t

4. Money supply On a similar track, money supply - a key monetary metric and important facet to the inflation picture - saw continued growth in !pril. 3o some e%tent the pace of growth in $hina can probably absorb some of the large e%pansion in the money supply, but there will certainly come a point where its influence will become increasingly inflationary. But as with loan growth - it lines up with comments by officials along the lines of being concerned about inflation, but happy to keep conditions relatively stimulatory to help the cement the recovery, and boost growth. 3he ?BO$ e%pects the broad measure of money supply which covers cash in circulation and all deposits, to increase up to 5/( this year compared with &77@.

III.

Causes and effects

1. Causes i. Causes of an overheating economy in general

Overheating of an economy occurs when its productive capacity is unable to keep pace with growing aggregate demand. It is generally characterised by an above-trend rate of economic growth, where growth is occurring at an unsustainable rate. Boom periods are often characterised by overheating in the economy.hi%, doan nay giong het denifition . !h ma van con link o chu Boom cau cuoi day to ctrl A click vao la dc 2++, neu phai gui ban mem cho thay thi doi 1ua file pdf truoc khi gui nhe BB ,? 3hen, high levels of aggregate demand tend to be the cause of overheating. If aggregate demand e%ceeds aggregate supply, then the e%cess demand for goods must be met via the over-employment of resources. 3his may be achieved by employing workers for e%tra shifts or using machinery beyond their recommended working hours. 3his type

of production is considered unsustainable because the over-employment cannot be supported indefinitely.

ii.

In the situation of China

tarting in 5@/', -eng CiaopingDs reforms opened the $hinese economy and were the maEor causes of $hinaDs economic growth. -eng Ciaoping introduced began a series of reforms known as gaige kaifang, or :reform and opening up.; <aEor causes of $hinaFs economy growth included the end of the commune system in farming, e%pansion of private business ownership and increased foreign investment in $hina. 3his created the huge growth rates and rise in G-? in $hina that continue today. Over the past &7 years, the world has witnessed one of the most remarkable economic transformations in human history. $hina, home to 5.4 billion people, has been e%panding its economy by more than ' percent every year since 5@'7 in its endeavor to pull its millions out of millennia of poverty. 3he $hinese government is clear on its strategy for uplifting its people - chanting the mantra of growth and doing its best to deliver. !nd successfully so, 3he $ommunist ?arty government has been running really fast Eust to keep ahead of burgeoning unemployment - 47 million former public-sector employees are out of work, 597 million former rural citizens are between Eobs in the cities at any given time, and about &77 million have no work at all. 3hus the ?arty, which like all authoritarian systems hates instability and social turmoil, has to create Eobs. !nd Eobs are created through growth and investment. o $hina has an undervalued currency and low interest rates and has now started to build an impressive fiscal deficit as well. Hith 597 billion yuan *U I5'.5. billion+ in treasury bonds in the &77& fiscal a year coming into place, $hinaDs budget deficit is set to rise 5@.&. percent to 47@.' billion yuan *I4/..= billion+, or 4 percent of gross domestic product *G-?+, an internationally recognized alarm level. In this 1uest of ' percent growth, $hina might Eust have bitten more than it can chew. 3he $hinese economy may be overheating.

5 more reasons behind the rise of China First, it is the pursuit of capitalism with a communist political system. $hinese

authorities have defended this combination as Jseeking truth from factsJ. !ccording to the &77@ annual 0urun "eport, there were 547 known dollar-billionaires in $hina compared to &. in India. Hay back in &777, according to the Kconomist, socialist $hina had the worldDs brashest capitalist economy. tarting from 5@/', -eng Ciaoping liberalised the economy without changing the political system. Second, $hina, like the Kast !sian 3igers, pursued a policy of state-sponsored capitalism in the Lapanese style, albeit in a much more accentuated form. 3here was a pronounced reliance on state-owned enterprises. Third, $hina invested heavily in physical infrastructure. 3he pace of accelerated investment in physical infrastructure is illustrated by how, relative to India, $hina ramped up its rail network. Hith only 99,777 km of railways in 5@'9, $hina had a smaller rail network than India *=&,777 km+. By &77=, with /9,777 km of railways, $hina had overtaken India which had =.,777 km. In &77=, as a proportion of G-?, $hinese annual investment of 5... per cent in infrastructure such as power, transport, drinking water, irrigation and telecom was almost three times that of India. Fourth, in sharp contrast to Lapan, $hina became the factory of the world, relying mostly on M-I. !fter the U , $hina is the second-largest M-I recipient in the world. Hhile M-I inflows into $hina from 5@/@ to 5@@@ amounted to I47= billion, annual average non-financial M-I in $hina was about I=7 billion during 5@@@-&77'. <uch of $hinese e%ports are by foreign-owned firms. In &77/, only four of $hinaDs top &9 e%porters were $hinese companies. Fifth, for most of the post-reform period, $hina followed an e%change rate policy designed to promote competitiveness. 3he renminbi which had been rapidly devalued from "<B 5.97 per U dollar in 5@'7 to "<B '.=& per U dollar by 5@@., was maintained at "<B '.&/ per U dollar from 5@@/ to &779.

It moved to a managed float in Luly &779, the renminbi gradually appreciated to "<B =.'& in <ay &77@, and remained more or less unchanged thereafter. $hina has had to intervene heavily to prevent the renminbi from appreciating, and in the process, has accumulated over I&.& trillion. 2. Effects i. ffects of an overheating economy in general is generally preceded by lower than average economic

Overheating

growth. -emand pull inflation demand-pull occurs as suppliers try to capitalize on the e%cess demand which cannot be met via e%isting production constraints. 3hese higher prices tend to reduce aggregate demand and e%ports *since goods and services become more e%pensive abroad+ leading to reduced consumption. $entral banks often simultaneously tighten monetary policy in response to increased inflationary pressures, reducing investment e%penditure, which in tandem with decreased consumption, can lead to economic recession. ii. In the situation of China

a) On the positive side It was revealed that $hinaFs economy, which is the worldFs third largest, e%panded at an annualised rate of 55.@( in the first three months of the year. First! consumption continues to be strong. $hina is transitioning to a consumption-based workforce. "etail sales rose 5=.& percent in nominal terms during October and have been accelerating. 3he retail sales figure isnFt a perfect pro%y, but it is the best available indicator of overall consumption because it does include sales to consumers and not Eust purchases made by the government. He also saw strong growth in industrial production *I?+ and power generation both were up more than 5= percent on a year-over-year basis in October. 0ousing starts were up more than 97 percent for the second straight month. Second! structural changes happen to domestic economy. HeFre seeing a transition to a service-related economy. 3he service industry is the fastest-growing sector

*roughly &7 percent faster than construction+ and now accounts for one-third of $hinaFs workforce. In general, the size of the service sector is directly correlated to the amount of goods and services an economy consumes. 3his is why the government has spent such a large amount of the stimulus on areas that benefit the domestic marketNthatFs where it thinks the economy is headed. Third! $hinaFs stimulus e%it strategy is simple--create a strong economic base that the private sector can launch from. !fter private investment surpassed that of stateowned enterprises in eptember, the two flip-flopped during October. Given the environment, month-to-month fluctuations like this are to be e%pected since private investment is dependent on how willing $hinese citizens are to put their own money at risk. Kven though BeiEing is determined to wean $hinaFs economy off of government stimulus, the government will not hesitate to ramp up activity should the private investors become risk-averse. Fourth! government controls on flow of money. !fter lending more money over the first five months of &77@ than all of &77', weFve seen loan numbers come down. 3hereFs a longstanding pattern of new loans slowing down during the second part of the year as banks have historically rushed to meet government-mandated loan 1uotas. 3he magnitude this yearFs slowdownNtrillions of yuanNis evident of BeiEingFs dedication to prevent a bubble from forming. Once the figures grew too large, the government moved 1uickly to hit the brakes. Hhile U. . regulators have many holes to plug in order to keep the economy afloat, the limited number of investment options available to $hinese citizensNbasically stocks, bank savings and propertyNmakes it easier for the government to institute controls. Fifth! $hinaFs Oong-3erm Goals "atch match u# $ith Short%Term &oals . 3he problem in $hina is e%cess savings and not enough spending. 3he short-term and longterm challenges are the sameNto get people to spend more.

"ecent signals that $hina will begin letting the yuan appreciate against the U. . dollar are not new. Mor several years, BeiEing has stated a gradual appreciation of the yuan will benefit the economy, and $O ! e%pects BeiEing to resume a 9 to / percent annualized appreciation process about midway through &757. "apid economic growth may be common in emerging economies, but thereFs only one $hina. !lready the worldFs third-largest economy on a nominal G-? basis and second-largest based on purchasing power parity, the $hinese arenFt making a break from the back of the pack, theyFre leading it. b) On the negative side <eanwhile, in recent years the $hinese economy, whose growth is heavily dependent on the e%pansion of investment has faced various negative effects including negative effects which are causes of concern in the future. First! there is increasing pressure to push up $?I. 3he first of such negative effects can be identified as the upward pressure on prices. ince &774, the $onsumer ?rice Inde% *$?I+ moved from minus figures into positive territory, and over the Lune to eptember period of &77. it rose year-on-year by over 9(, which is the line set by the government as an inflation warning. 3his is due to an increase in food prices caused in part by reduced production of grain and oilseed crops due to natural disasters, and increased living costs *utility costs+ reflecting increases in energy demand. 3he upward pressure on food prices which had been particularly sharp, was alleviated somewhat by increased food production from summer &77. and over the entire year food prices rose 4.@(. Second! there is also growing shortage of electric power as a result of rapid economic growth. Kven though the electricity generated increased by 5..9( year-on-year for the Lanuary to eptember &77. period, the electric power shortage in the summer reached 47 million kilowatts, resulting in a serious situation that was called the worst electric power shortage since the 5@'7s.
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Third! property prices are rising. Investment in property development in &77. increased by &'.5( year-on-year and remained at a high level compared to overall fi%ed asset investment for the same year *&9.'( year-on-year+. ?roperty prices are also rising in light of this active investment in property development. -ay nua, minh sua so lieu cua nam &757 Third! property prices are climbing at markedly rate. $hinaDs property prices rose by a record 5&.'( )O) in !pril, due to a comparatively low base in &77@ and a time lag for tightening real estate policies to take effect. !ccording to the 6ational Bureau of tatistics *6B +, the !pril increase topped an 55./ percent Eump in <arch that was the highest since the survey of residential and commercial prices in /7 cities started in Luly &779. !s $hinaFs central bank has pointed out, it is possible that because supply-side regulations were drastically strengthened through the governmentFs measures to tighten investment even though there was vigorous demand for property, these measures instead worsened the supply-demand balance and accelerated the increase of property prices. Given that a disproportionate amount of bank loans has concentrated in the property sector, the ?eopleFs Bank of $hina warned that there is a potential risk that a bubble will form in the property market. Fourth! there are concerns about e%panding nonperforming loans. !midst e%panding investment, banks sharply increased loans for purposes including property development, individual housing and automobiles, but there is a possibility that loans especially for property development were provided under inade1uate bank inspections. -epending on future trends in the economy and property market, there is a concern that new non-performing loans will be generated. 3he proportion of nonperforming loans among maEor financial institutions at the end of &77. was 54.&5( or

..=( lower than at the end of the previous year. 6on-performing loans in $hina have risen into the :trillions of renminbi; because of poor lending practices. 3he ?eopleFs Bank of $hina has underlined the concern that the risk involving property developers will inevitably lead to a risk in banksF credit risk. <eanwhile, the overheating economy in recent years and resulting government measures for fiscal tightening have a maEor impact on loans to small and medium enterprises including private sector enterprises and individually-owned enterprises. Fifth! there are concerns over issues including overproduction and growing inventory for steel, aluminum, automobiles and cell phones. In the process of e%panding investment, these markets e%perienced either a succession of new market entrants or increased scale of production.