Saturday, February 13, 2010

And China Takes The Lead

The Chinese central bank tightened credit Friday by requiring banks in China to increase their reserves for the second time this year. Bernanke has not yet pushed for a tightening of credit in the US because of our high unemployment, still devastated real estate market, and lack of consumer spending. As soon as these three things begin to recover we will see a rise in interest rates to avoid inflation brought on by a "too rapid" recovery which, when driven by low interest rates, causes a rise in the cost of goods that exceeds wages and lowers the value of the US dollar. This creates a hardship for most Americans.

Before China became the World’s #3 economy (about to become #2), China’s economic success was indirectly influenced by the United States because we were one of their top customers worldwide. Since then, the country went crazy giving out zero-interest loans to Chinese businesses in order to promote business growth, and the country is now well on its way to becoming much more self-sustaining.

This has some serious implications for the United States. China’s total population in 2009 was estimated at 1.3 billion. That means if China is able to get its middle-class (a class that can afford consumer goods) between 23 and 24% of its total population, then China’s middle-class will be equal to the United States’ total population, which would allow China to not be nearly as dependent on selling goods to the U.S.

China’s current economic successes can already be seen because the U.S. has had to slow down its purchasing, while China is back to buying more expensive commodities, such as steel. China is now not as dependent on U.S. purchases of goods to unilaterally drive its economy. China’s domestic consumption and its trade to other developing economies, such as Brazil, has put China's recovery well ahead of the recovery in the U.S. This is why their central bank is already applying a little bit of the "brake pedal" to the Chinese economy by tightening lending practices.

1 comment:

  1. That is simply the nature of economic recovery...some nations experience a greater fall than others, and some experience a greater or faster recovery than others. A lot of the determination of who falls into what category falls in the monetary and fiscal policies of the country's government to steer their respective economies toward recovery. However, China has the advantage of have over a BILLION people...over 4 times that of the U.S., and that is a huge asset. China was also less sophisticated financially and as invested as deeply in complex financial instruments as the U.S. was, so they experienced a lesser crash. Nonetheless, the U.S. will recover and eventually tighten up credit as China has done recently.

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