Case 3: China - A Fever without Temperature

(a) How did China achieve the combination of high growth and low inflation in 2001-2003?

Chinese economy booms despite SARs outbreak that make a little slowdown expansion
in second quarter while consumption looks weaker than the economic growth. This reflects
imbalanced supply and demand from the faster pace of a rapid increase of investment and fast
rising exports than consumption which is relatively weak and not match the supply side. There
is a decreased consumption according to SARs epidemic in just some sectors such as tourism
sector while there are some sectors that accelerate higher price at that time such as property
prices and some raw materials which these do not reflect on CPI index or consumption side
because it reflects changes in price of producer’s side or PPI. At the end of the day, both CPI
and PPI that represent inflation still low comparing to GDP growth as the problem of excess
supply or over-rapid investment.

Chinese’s CPI and PPI graph

Combination of high GDP growth

GDP = C + I + G + Net (Export – Import)
Actually, Chinese economy grew continuously before hitting worse situation of SARs spread out
in 2003. That is why we see the GDP growth despite SARS spread-out. Also, the Chinese GDP
growth in this period is supported by many factors as the following;
1. Government trying to boost economic all along and this creates the acceleration of
investment by…
a. Accession to the World trade Organization (WTO) in December 2002
 b. Trade liberalization and investment policy which lead to robust expansion of
investment and high volume of international trade
c. Massive inflow of FDI growth (as attraction of giant market and low wages)
2. Faster export expansion boosted by depreciation of yuan and beneficial from being
WTO’s membership

All these factors make GDP majority contributed from I (Investment) which account
around 45% of total GDP (grow 27% YoY) and Net Export.

Combination of low inflation rate

Nevertheless, CPI of inflation rate showed a minimal rise as overwhelming of investment.
However, there are some SARs outbreak impacts and factors that reflect on low inflation…
1. Limitation of people movement and relevant logistic impact from SARS outbreak
2. Negative income-effect in some sectors of SARs leads to lower consumer spending
(Decreased multiplier effect in some sectors leads to lower consumer spending)
3. Prices decreases in the long-term as competition in the deregulated market leads to
more efficient allocation of resources and lower profit margins.

(b) What is your understanding of the phenomenon of "a fever without temperature"?

“Chinese economy is overheating while CPI or consumer demand cannot be an indicator to

warn the problem of economic situation. Thus, this situation looks similar to “A fever without
temperature” as Chinese economy has a fever but does not see a high temperature as normal.

In other words, “A fever without temperature” is a quote to express Chinese economy that has
the invisible of economic-problem situation that might lead to downturns in economy in the
future. This is literally unhealthy economic growth or an inefficiently economic growth which go
rapidly faster than it really should be. And this is a symptom of overheating economy or the
bubble economic boom that should be overlooked, especially on the side of manufacturing. In
this case, we can see the overheating situation in some industry such as property sector. In
2003, real estate sector increased nearly 38% from 2002 and it raised the prices rapidly from
too much speculation, not real demand. This means prices increase but no value creates in
economy. And this does not effect on CPI or consumer spending since it defines in investment
area of construction and development infrastructure development. (That is why we still see low
inflation)

Normally, if we see the great growth of economy which reflects in higher of GDP, it shows that
the economy is expanding. However, if economy growth is too much, it can bring in a negative
effect and leads to long-term problems as it used to happen in East Asian countries before as
Thailand’s 1997 Financial Crisis.

Overheating usually arises from consumer demand which reflects in higher level of inflation
rate or CPI. However, in this case, overheating arises from imbalanced supply side, not from
consumption side. Overheating is more than just inflation since overheating can arise from
many factors such as overinvesting in fixed-asset and construction which leads to excess supply
and non-performing loans (NPLs), etc.

(c) In late 2008, the Chinese government initiated a stimulus package of RMB 4 trillion. In
2009, the Chinese economy grew at about 10%, and the CPI inflation was low. Should the
Chinese government worry about "a fever without temperature"?

In my opinion, Chinese government should take this considerate and control. 10% of GDP can
be considered as over-rapid growth because inflation does not rise aligned with the economic
growth despite a stimulate package launching. Looking into certain sectors, especially real
estate, there will be a case that investors are too pessimistic about economic expectation which
leads to over-investment and excess supply. Property sector shows an increase of 12% from
May 2009 to May 2010 even though bank lending fell 31%. Housing sale volume in Shanghai
and Shenzhen decline 70%. This is a sign of overheating even though the CPI inflation was low,
the thing is we cannot look only inflation.

In this period, new challenges have arisen which makes China cannot attract more foreign
investment as in 2003 as…
- Increased wage rate
- Lower volume of labor
- Increase in Public debt

These really reflects that Chinese government should beware of the economic situation and
control before economic bubble happening. The government can use policies to response to
the situation including limiting the quantity of loans and restricting on further investment in
certain fastest-growing sectors. However, Chinese economic growth has its perk from high
saving rate fundamentals, unlimited surplus labor and huge internal market as well as effective
macroeconomic management.
Case 4: The Japanese Slump
(a) The Japanese stock prices and land prices had skyrocketed in the 1980s before crashing in
the 1990s. Use a graph to explain the effects of the stock and land price crashes on the
Japanese real GDP and price level.

Using IS-LM to descript the situation

The stock and housing market crash >> consumer wealth reduces >> consumption
decreases >> effects IS curve to reduce or shift left >> GDP declines
Furthermore, I put some graph to show what happen to Stock and Property prices
including GDP as below.

The Japanese asset bubbles

Japanese GDP
(b) The Japanese short-term interest rate was reduced to less than 0.3% in 1999-2004. It did
not seem to have given the Japanese economy a sufficient stimulus. In your view, why
didn’t it have a large impact on boosting investment?

In my opinion, I think using only decreasing the interest rate cannot sufficiently boost the
economy and cannot boost the investment because the problem is all investors and producers
already moved out their factory to outside of Japan due to their Yen appreciation after Plaza
Accord. Also, people still have a fear to spend money and invest excessively like in the past due
to uncertain expectation in the future as this economic problem made people suffer in all
system, not some sectors. Moreover, decreasing interest rate creates burden on consumers as
Yen depreciation makes prices of import goods increase, effecting both consumption of
household and small-medium enterprises.

(c) The Japanese policymakers felt constrained by the high level of public debt and zero
interest rate. Can you recommend a policy (or policies) that can boost the Japanese real
GDP without increasing public debt and decreasing nominal interest rate?

1. More restriction on investment especially in property sector

a. Look over and control the regulation about loan approvement of financial
institution
b. Some huge investment needs to be approved by government
c. Control every institution to be response for the protection of deposits as
establishing the deposit protection agency (DPA)
2. Fiscal policy
a. Decrease tax rate to boost the volume of consumption and lesser the corporate
tax
b. Launching tax benefit to attract foreign investment in Japan
c. Increase infrastructure investment in urban areas to raise citizen living standard
in the long-run as well as creates more jobs.
3. Supporting more investing lesson to Japanese to reduce too much saving behavior (this
will help decreased tax rate policy applicable more efficiently as people will invest more)
4. More child policy to get rid of an aging society problem (this will help increased
government infrastructure spending policy applicable more efficiently as it will create
more newborns to match job creations to boost economy)