China Overheating Indicator on a Gentle Downward Slope

Thursday, June 30, 2005

Don't worry about an overheating of the Chinese economy. Deutsche Bank Research has published its latest reading of the so-called "China Overheating Indicator" (pdf) (COI) that remains on a gentle downward slope and below the amber threshold, indicating weaning overheating pressures.

COI June 2005

GRAPH: The COI tracks demand factors that exert upward pressure on prices and can be used as leading indicator for inflation with a lead of roughly 12 months. To gauge the extent of overheating pressures, DBR has established 2 thresholds, amber and red, which indicate increasingly high degrees of overheating risk. The amber and red thresholds represent 1.5 and 2.5 standard deviations from the historical average of the series, starting in the period after the last big overheating/high inflation episode in China in the early to mid 1990s. The 2 thresholds are intended to serve as warning: If the COI crosses the amber threshold from below, it signifies that the COI is nearly entering overheating territory. Moving above the red threshold indicates the presence of overheating. Conversely, if the COI falls below the amber threshold it would indicate that overheating pressures are subsiding.
The COI comprises merchandise exports, retail sales, industrial sales, money supply, domestic credit and per-capita income.

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