Re: Chinese economy
From: zerge (zerge_at_hotmail.com)
Date: 11/09/04
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Date: 9 Nov 2004 09:58:02 -0800
muditha@email.com (muditha) wrote in message news:<5c8acd0f.0411090308.bdc99ca@posting.google.com>...
> > A "hot" economy means that it is growing at a pace beyond the system's
> > capability of keeping it up for a long time. If you keep running a
> > motor engine for a long time at high revs, eventually it will break
> > down. Same for economies. What happens when an economy overheats?
> > First of all, investments, both debt and capital, are done without
> > proper due diligence, caught in the exitement of hypergrowth. In other
> > words, irrational exhuberance takes hold. Money is assigned to
> > projects doomed to fail, and overcapacity is build in several
> > industries. This overcapacity will eventually lead to very damaging
> > war prices, and to loan defaults, and maybe to bank failures.
> > So it is not bad for an economy to continuosly grow, as long as it
> > doesn't grow too fast. When there is too much money to invest,
> > investment is done carelessly, increasing business risk. To cool down
> > the economy, the central bank withdraws money from the economy by
> > raising interests (among other monetary maneuvers). When interest
> > rates are higher, some investments are less profitable than just
> > keeping your money in the bank, so banks are less prone to lend money,
> > and since money is now more expensive, less companies are willing to
> > take loans.
>
> Thanks a lot but I have a small question,
> How can a country decide when its' ppl. start wasting money in
> unneccesary investments? Are there any specific indicaters a gvt. can
> take a look into?
>
> Thanks a lot.
> Muditha.
The number of defaulted loans. In a healthy economy, there is a
certain percentage of loans that don't get repaid to the bank because
the business fails. That percentage is specific for each country, and
goes up and down with business cycles. But if the % of defaulted loans
goes above a certain level, the profitability or the very existence of
the banks are threatened. This is the danger level the government must
keep an eye on. Unfortunately this is not a very precise indicator,
and sometimes, specially in cases of overcapacity in one or several
industries, business failures are fast and simultaneous, leaving no
maneuvering space for banks or governments.
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