Economist’s View: “Dangers of an Overheated China”
In economic terms, the prices of Chinese exports will probably fall, as overextended businesses compete to justify their capital investments… American businesses will find it harder to compete with Chinese companies, and there will be deflationary pressures in both countries. And … the Chinese … may have less to lend to the United States government. … The United States will face higher borrowing costs, and its fiscal position may very quickly become unsustainable.
That’s not so much a prediction as a very possible contingency, and we should be prepared for it. For now, we should avoid two big mistakes. The first would be to assume that just because borrowing costs are now low, we can postpone fiscal responsibility and keep running up the tab — with the aid of Chinese lending, of course. The history of financial crises shows that turning points can come swiftly…
The second mistake would be to demand too many concessions from the Chinese. What we see in the numbers today are a growing China… Yet there’s a real chance that, soon enough, Chinese economic weakness will be a bigger problem than was Chinese economic strength.