Still little evidence of overheating (Aug 06)

The surge in GDP growth in the second quarter has encouraged fears that the Chinese economy is about to overheat. However, there is still little hard evidence of an inflation problem. The monetary data suggests that consumer price inflation might rise to 3% or so by the end of the year, but that would still be a comfortably low rate, and no higher than existing official forecasts. We would also expect this to be the peak for inflation in this cycle. Worries that further increases in interest rates will cause a “hard landing” are certainly misplaced.