Posted on 11/29/2009 5:18:10 AM PST by TigerLikesRooster
November 29, 2009
ECONOMIC VIEW
Dangers of an Overheated China
By TYLER COWEN
PRESIDENT OBAMA’S recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector. Yet this arrangement may unravel in a dangerous way, and if it does, the most likely culprit will be Chinese economic overcapacity.
Several hundred million Chinese peasants have moved from the countryside to the cities over the last 30 years, in one of the largest, most rapid migrations in history.
To help make this work, the Chinese government has subsidized its exporters by pegging the renminbi at an unnaturally low rate to the dollar. This has supported relatively high-paying export jobs; additional subsidies have included direct credit allocation and preferential treatment for coastal enterprises.
These aren’t the recommended policies you would find in a basic economics text, but it’s hard to argue with success. Most important, it has given many more Chinese a stake in the future of their society.
Those same subsidies, however, have spurred excess capacity and created a dangerous political dynamic in which these investments have to be propped up at all cost.
(Excerpt) Read more at nytimes.com ...
Ping!
Death to Neo-fascist China!
Only a dead Communist is a good one :)
The author didn’t mention monetary policy or carry trade. The NYT will learn about that in a few years after a couple more unwinds like 2008. Each time we do this there is less sustainable economic activity and more oversupply and distortions into sectors that are easy to lend into. The author mentions the office building boom in Shanghai. That’s from carry trade, the money is borrowed cheaply here, invested in Aussie dollars which flood the high end lending market in China.
bttt
It’s easy to condemn China, and there are many good reasons to do so. The thing to remember is that China, along with Japan, has been propping up our economy by buying American currency so that we can continue to buy their exports, reducing the impact of deficit spending. If that stops, the consequences to the U.S. could be dire.
Unfortunately, U.S. in economic crisis means, from now on, China would exacerbate its own pathology as well. To the point of breakdown, just as U.S. did. Chinese economy is a pathology hitching the ride on the pathology of U.S.'s.
Thanks for the ping, nothing to add. Just trying to learn.
...good post with reasoning considerations.
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