When does an economy reach the overheating stage?
In a developed world economy like Australia, it would be an annual growth rate above five per cent, or maybe six per cent consistently for at least half a year, perhaps nine months. In real terms, meaning a nominal figure close to 10 per cent.
If it went on that long, the Reserve Bank would shove up interest rates to slow things down.
In the US, the same would happen: the Fed would move very quickly (but we can't see that happening for quite a while). In Japan, above four per cent and for at least a year (the political obstacles to a rate rise would probably allow it to go on that long).
So what are we to say about China where gross domestic product increased 11.9 per cent in the second quarter, while inflation jumped to 4.4 per cent?
It certainly isn't cool, but is it out of control?
Looking at the 2006 GDP number and the answer would probably be no. 2006 GDP was recently revised upwards from 10.7 per cent to an annual rate of 11.1 per cent.
Commentators in Hong Kong said the Government didn't revise any quarterly figures from 2006: just the annual GDP growth figure. Odd!
First quarter GDP grew 11.1 per cent. And the Chinese Government has wanted to see growth return to around 8 per cent for the year. That will be impossible.
No matter how it's measured, China is booming.
It's where the money is and where we Australians have followed the money to in terms of exports of goods and services.
The Chinese boom needs more of our iron ore, coal, LNG, oil, copper etc etc, to feed it: it's why the banks of the world will lend Rio Tintoa gross $40 billion to complete the takeover of Alcan for around $44 billion, or a bit less, depending on the value of the Australian dollar.
It's why the Aussie dollar is trading at 18 to 20 year highs of around 88 USc.
It's also why we are running healthy budget surpluses and why we have the best terms of trade ever.
In China, the rise in GDP was stronger than expected by the Government or commentators.
The rise in the cost of living was blamed on rises in food prices, which jumped 7.6 per cent in the first half of the year, driven by a 20 per cent jump in the cost of meat (pork) and poultry. China has an inflation problem, but like us with bananas last year, it seems to be linked to a one-off problem which has driven up the cost of food.
The strong growth in GDP and prices has raised questions about whether Chinese interest rates and reserve lending ratios will be again increased.
But even in China, interest rates and other controls seem to be becoming sensitive issues for the un-elected government.
There have been two rate rises this year already, and several tightening of the lending reserves imposed on banks which force them to hold more money on their balance sheets and not lend it to customers.
A drop in fixed asset investment growth to 25.9 per cent in the first half – down almost four per cent from the first half of 2006 – was cited by government spokesmen as a sign of the changing nature of the Chinese economy.
A 15.4 per cent rise in retail sales of consumer goods, the fastest rise since 1997, was also cited as how the economy is gradually moving away from business investment to consumption by consumers. Well, maybe.
That 11.9 per cent growth rate was the fastest in a dozen years. That says it all.
Of course, that's re-ignited the continuing complaint about China's undervalued currency, which rose 1.5 per cent in value against the greenback in the second quarter.
That was the fastest since China abandoned a decade-old peg to the dollar two years ago this month. It has gained 9.4 percent since then.
China's stockmarket boom is cooling.
The benchmark CSI 300 stock index has risen 87 per cent this year but since its peak on June 19, it has sagged 11 per cent.
That's a significant correction and the moves to cool it by scrapping or reducing the 20 per cent tax on interest income and raising stamp duty on share trades are cooling the stockmarket.
China has cut export rebates twice so far this year to discourage investment in industries which pollute and use energy including steel, cement and fertilizers. It has also cut export rebates on sensitive exports, such as clothing and textiles
China's trade surplus was $US112.5 billion in the first half of 2007, up 84 per cent from the first half of 2006. It's forecast to hit $US250 billion up from $US177.5 billion for all of 2006.
China's foreign reserves are the world's largest at $US1.3 trillion at the end of June.
With growth close to 12 per cent, China will move past Germany as the third largest economy in the world. It has probably already done so.