Thursday, March 8, 2007

Why slow down Mainland China?

"The latest news reported that mainland China plans to slow its economy and reduce the GDP growth rate to 8% this year from last year's double-digit expension. I wonder why it's necessary to reduce GDP growth rate? Isn't it the higher the better? Could you explain this for me?"

There is a lot of talk of "overheating" in the mainland economy. The basic idea is that very high growth rates may not be sustainable. If the mainland economy is growing at 10%+ per year, every year, maybe firms and property developers will start to make careless investment decisions- overinvesting in real estate and fixed capital. In the short run, the effect of overinvesting increases the growth rate of the economy. But eventually they would be forced to cut back on their investment severely, leading to a large drop in the growth rate, or even a recession. Think of the mainland government preferring stable growth of 8% instead of higher growth that may be unstable in the future.

2 comments:

Anonymous said...

But why is it 8%? I mean how does the government determine the exactly rate which is neither over nor under heating? Is there any methods? Thanks!

HongKongMacro said...

8% is most likely an "educated guess" at what can be sustained over time.