Economy is only partially overheated

  • Investment demand does not mean an overheated economy

  • Basis production factors (natural resources, human resources, capital, entrepreneurship) have not yet been saturated

  • The problem does not lie in the volume of investment but in its structure

  • Both macro-controls and micro-adjustments are required

    Since June a number of people have argued that the Chinese economy is overheated. Has this in fact happened?

    An economy is governed by two things: supply and demand. If demand is high, overtaking supply, prices will rise -- a factor in an overheated economy. It is also important to consider any gaps in production, for this gives some indication of whether or not the unemployment rate will decline.

    In terms of price, the consumer price index grew by around 2 percent in the first half of this year under a little pressure from inflation. However demand is not the only thing driving up prices; the upward trend in the price of energy resources and other raw materials is also a factor. One possible reason is that investment demand is growing rapidly. But does the growth of demand indicate an overheated economy? The economy cannot be deconstructed so simply. Basis production factors have not yet been saturated while the price of energy resources and raw materials is soaring.

    China has no shortage of capital. Deposits are increasing faster than loans. Foreign exchange reserves are also growing. As of June, China's forex reserves had exceeded US$940 billion, the largest in the world. The foreign trade surplus is growing constantly. This year the surplus has been increasingly monthly and surpassed US$61.4 billion in June. On the basis of the identical equation of macroeconomics, a trade surplus indicates that deposits are greater than investment. If the government's expenses are greater than its income, then non-government deposits will be far greater than investment. The financial deficit of the Chinese government shows that more non-government investment is urgently needed -- deposits of non-government funds are too high.

    China also has a large labor force. The urban unemployment rate is about 4.2 percent, which is quite high. In the countryside particularly, there is a surplus of labor. According to the Ministry of Labor and Social Security, 45 million people will migrate to the cities for work. Even when the rural labor force is taken into account, employment pressure is still very high in China.

    China has no shortage of human capital. Technology and innovation have become the driving force in economic development. China is advancing rapidly and it relies on the talents of many, or human capital. China should not lack human capital. However, if university graduates are a measure of human capital, then there is a major problem. The lack of employment opportunities for college students has become a social problem. Statistics show that 31.7 percent of unemployed young people are this year's college graduates.

    If the most basic production factors -- capital, human capital and unskilled labor -- have not been fully utilized, if the price index has not risen markedly, how can the economy be overheated? If China still has an abundant labor force, including unemployed college graduates, if a great amount of rural labor force need to migrate, the Chinese economy still has plenty of room to expand before it overheats.

    Rocketing real estate prices should also be considered, as these are not included in the consumer price index. Does the rise in cost of a certain product, especially capital goods, indicate an overheated economy? Of course it does not. China's economy is probably not overheated, but there are some structural problems, such as over-investment in real estate.

    The Chinese government should implement macro-policies such as monetary and financial policy to alter the economy and micro-policies such as tax policy, industrial policy and income distribution policy should be fine tuned.

    The author Yin Xiangshuo is economics professor at Fudan University; translated by People's Daily Online.

    People's Daily Online ---