China’s Post-WTO Accession Boom: Is China Overheating?

Abstract:     
Following WTO accession, China's economy boomed in a context of eye-popping figures for growth in trade and investment and a sharp run-up in its own domestic prices and in prices for commodities for which is has a voracious demand. For many analysts, this suggested that China is the next bubble. Clearly, there is sufficient circumstantial evidence to suggest that China is in the midst of a cyclical surge of economic growth and is "hot" in the sense that prices are disposed to rise. This paper examines the lines of reasoning that have been used to support the bubble contention. These include the Asian Crisis analogy, the argument that China is over-investing and creating an investment bubble, and excessive monetary expansion. While it is not possible to definitively rule out the possibility that China is in dangerous "bubble" territory and at risk of a crisis, the paper concludes that the arguments adduced in support of this contention are not persuasive. The paper further argues that China’s post-WTO accession boom effectively silences theories that the slowing growth in China in the second half of the 1990s represented a longer-term trend, indicative of a looming crisis of unemployment; the cyclicality of China's growth dynamic is now accepted. At the same time, theories that China is exceptional in terms of having a "limitless" supply of labour – an argument that amounts to claiming that China has a horizontal supply curve and can expand without risking inflation – need to be re-examined based on the early anecdotal evidence that the labour supply is perhaps not quite as limitless as previously thought. From a policy perspective, the speculation about a bank-lending-driven "bubble" will hopefully not divert attention from standard counter-cyclical policies to moderate the pace of expansion while also addressing China's longer-term issues. For example, the boom is an opportunity to expand the government's fiscal capacity, which will, in the long run, be necessary to deal with looming issues such as social security and shoring up the banking system.

Number of Pages in PDF File: 16

Keywords: China, over-heating, bubble

JEL Classification: E65, E66

working papers series