《China’s Post-WTO Accession Boom- Is China Overheating》.pdf

China’s Post-WTO Accession Boom: Is China Overheating? * Dan Ciuriak October 2004 Introduction In the wake of China’s accession to the WTO, its economy is booming 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, China is the next bubble. This concern is framed succinctly by Andy Xie, Morgan Stanleys Hong Kong-based Asia markets specialist: Speculative capital poured into China for two years as the Fed cut interest rates to 1 percent. Ample liquidity triggered an investment boom that ex- acerbated inflation. The resulting negative real interest rate amplified in- vestment demand and caused a speculative bubble. China may have in- vested US$200 billion more than it should; fixed investment may be 20 percent above trend. This must be brought below trend for a period to ab- sorb the excess.1 Carl Weinberg, chief global economist at High Frequency Economics Ltd. in Valhalla, New York, echoes this concern: We have banks that dont make sense making investments in companies that dont make sense. Thats one of the biggest reasons to be concerned about China.2 Some base their concern on the simple intuition that the disparity between the growth of in- vestment and the growth of consumption implies that a glut is looming on Chinas horizon: * Dan Ciuriak is Senior Economic Advisor, Trade and Economic Policy and Trade Litigation, De- partment of International Trade. An earlier version of this paper was presented at th