The risks of an overheating economy

China’s economy, the regional powerhouse, is growing even faster than expected. But that’s not the way it turned out. Shortly before China’s government said, late last week, that the economy grew at an annualised pace of 11.1% in the first three months of 2007, and as forecasts rose for the year’s overall growth, traders on the region’s big exchanges briefly took fright. The next day markets rebounded. Read original article.

Nobody is jumpy about growth, of course, but of the government's reaction to it. Chinese officials are getting worried that a meltdown may be pending, and have been intervening to dampen things down. But over the past few years tighter interest rates, lending restrictions and heavier bank regulation have failed to cool the economy. Now they may have to be even more aggressive.

China’s fairly primitive financial infrastructure makes it difficult to fine-tune credit through monetary and fiscal policy. As worries grow about credit bubbles and overinvestment, no one knows quite how hard the government may need to step on the brakes. All this makes investors, who should be bullish, uncertain about what the near future may bring.

Across the Pacific, protectionists in America, who should be displeased to hear of even faster Chinese growth, may have found a note of cheer. If the Chinese government wants to get runaway growth under control, it may allow faster appreciation of the yuan.