CHINA'S economy is not overheated but chaotic - a consequence of its switch from a planned to a market system, according to Beijing University economics professor Xiao Zhuoji. ''If we compare the planned economy in the past with the existing one, the present one seems very chaotic,'' he said. While prices were fixed in a planned economy, in a market system they responded to the forces of supply and demand. He said foreigners' views of the ''chaotic'' Chinese economy were understandable as the ''rules of the game'' had been established in the West for hundreds of years. ''As they look at the Chinese economy, it's just like an adult watching a child walking,'' he said. Many regarded China's economic growth over the past two years as too fast. But Professor Xiao said: ''Everybody is saying the country is just overheated, but what is the definition of overheated?'' He said China's economic performance should be judged on the basis of a longer period than two years. For the five years to 1992, he said, the economy had grown at an average annual rate of 8.7 per cent. This compared with the average nine per cent growth recorded by Asia's four so-called dragon economies when they were taking off. Professor Xiao also disputed the notion that China's high inflation was a consequence of rapid economic growth. ''There is no inevitable linkage between high economic growth and high inflation rate,'' he said. Annual inflation was running at 12 per cent, and had touched 20 per cent in China's 35 major cities. But Professor Xiao said many factors other than rapid growth could be blamed. The factors increased prices of staple foods and higher consumption in cities. ''You cannot just simply look at the economic growth figures and link it to inflation,'' he said. Professor Xiao said changed circumstances meant the present phase of rapid economic growth and inflation would not be followed by an economic slowdown, as had happened in the past.