I read on Bloomberg this morning in the article about ChinaTop government leaders last month agreed the two key risks facing the economy in 2008 are overheating and inflationI thought overheating means inflation, but I'm probably wrong. So, what is meant by overheating?

Maybe it refers directly to GDP growth (which usually would lead to inflation)?

Overheating is a possibility of the market or its part to sink significantly. I remember heard Greenspan speech were he used this word just before computer's industry fell down to describe economic condition in US. It was obvious that there is no area for large investment of the money surplus to support economic rate of the growth that had been reached in previous years It looks that the overheating and inflation have also a common ground: surplus of money pumped in the fields. It is probably a similar situation with China finance though it is not clear why economy should fall. Low level of wages is an internal protection Governmental capitalism helps the government control macro economy rather accurately. Low fixed exchange rate with respect to $$ is a secure policy while major currency are try to support $$. The main danger is probably possibility of the rebalancing of the macro economy when US or other large manufactures might moved to own countries. I think that sooner or later the importance of this macro factor will grow. Nevertheless the internal possibilities of the China economy also sufficiently large in primary fields such automotive military and others. The politics is also sufficiently plain and stable and Iran and Iraq conflicts are somewhat soften the external influences. Some economic commentators time to time are trying to produce positive news to support positive trend of the native economies. It looks like if Chinese politicians will not make strong and harsh movements it would be o'k there until US or Europe will not sink remarkably.

Overheating refers to imbalances in which demand is outstripping capacity. Overheating may cause inflation, especially if labor is in short supply and has bargaining power. In China's case, I think they are facing a shortage of capacity in energy and raw materials (e.g., steel, copper, and concrete). Labor is less of an issue in China although labor rates have climbed substantially on the coastal cities. The point is that overheating refers to the imbalance and inflation is a commonly caused by overheating, but the two aren't exactly synonymous.

QuoteOriginally posted by: YuraI thought overheating means inflation, but I'm probably wrong. So, what is meant by overheating?overheating refers to stock market. like all indeces r sky rocketing. which is precisely the case with China.it's actually much better than what we have: stagflation prospects, i.e. the opposite slowdown + inflation.they should notch up the rates, which would slow them and curb the inflation at the same time. they can also let their currency appreciate to Dollar, which would achive [somewhat] similar effect

"they should notch up the rates, which would slow them and curb the inflation at the same time. they can also let their currency appreciate to Dollar, which would achive [somewhat] similar effect"Under fixed exchange rates no autonomous monetary policy is possible (Mundell-Fleming model). This is the root of the problem. In order for China to keep its currency from appreciating against the USD, China must keep its interest rate way too low, this causes their economy to grow faster than increases in productivity would allow, and ultimately causes inflation.China cannot increase rates without breaking the peg.