Question 1
James Hoge, Jr., Editor of Foreign Affairs
Is there a potential overheating problem in China and what is the central government doing
about it?
I want to go back to the question of whether the Chinese economy is overheating or not, in part because it is so much in the news right now, but also because it is so important to not only the Chinese economy but also to global businesses. You all know the issues:
9.7 percent growth rate, which is considered to be more than they can handle on a sustained basis.
Overlending, which continues at a rather high rate.
Fixed investments at 43 percent, which is creating overcapacity.
I could go on. China has changed a great deal since the last time it overheated, which was about 10 to 12 years ago. The economy was much smaller then; it was not as decentralized as it is now; it was easier to control by central command. And as I recall, the central command at that point was a little bit too heavy with the foot, and brought on some recessionary characteristics that hurt for quite a while. If that were to happen this time, it would have a tremendous effect, not just on China, but on the whole Asian region and on the global economy.
Answers
Victor Chu, Chairman and CEO of First Eastern Investment Group
We need to be aware of two dynamics. One is that China is country where you have the First, Second and Third Worlds combined. The coastal region, where Hong Kong, Shanghai, and Beijing are, these are in the First World. And then you have then Second and Third Worlds farther into the interior of the country.
When the overall country is growing at 9.1 percent, then you can be assume that Shanghai and other cities along the coast are probably growing at 15 to 20 percent. So I think one of the real problems is regional disparity. The gap between the haves and have-nots is huge.
Now in terms of cooling the economy, there’s been a major change in the government’s mind-set. In the past, when there was a problem with overheating, the government just shut everything down. This time around, I think they are going to be more rational. The policies are going to be far more selective. So I think that the chances of a soft landing, if there is going to be any kind of landing at all, are much better this time than the chances of a hard landing.
Yibing Wu, Partner in McKinsey’s Beijing Office
The answer to this question partly revolves around whether the central government will able to control the provincial governments. But overall I’m confident because issues are already being escalated selectively. For example, the State Council had a special meeting recently just on the overheating of the steel industry, looking into overcapacity and where it was happening . The pragmatism and the ability to focus on such specific areas impress me.
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