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Trends in Asia

Page history last edited by PBworks 15 years, 8 months ago

page director: Brian D. Butler

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Rising importance of China

 

The massive industrialization of China and their subsequent entering of the global economic scene has had major impacts on markets around the globe.  The Chinese ascent into the WTO and the move for china to essentially become a manufacturing shop for the world has had impact on many industries.  On the supply side, Chinese products have kept inflation down in the developed world as consumers in the US and Europe have been able to see falling prices for most of their imported manufactured goods.  By keeping prices down, and inflation under check, this has allowed  central bankers around the globe to have freedom to set interest rates relatively low, which has spurred growth without the corresponding inflation.  One of the side effects of this mix has been a boom in asset prices as money has flown into stock markets (internet bubble) and into real estate (subprime lending).   Internally, China has also been booming.  They say that 2 or 3 new cities the size of Manhattan are built in China every 5 years.  This massive construction and economic boom has led the Chinese to search the globe for raw materials (oil, gas, minerals, commodities, etc).  As the Chinese demand for commodities has surged, the commodity producers around the world have enjoyed massive price increases.  Also, as the Chinese consumers become more affluent, there has been a corresponding boom in Luxury goods industry and status products being sold in China, as well as a booming Automobile Industry.   Overall, the rise of China is changing the nature of global business in unexpected ways.  This is even in spite of recent reports that China might be smaller than once expected.  see more in our discussion of Emerging Multinational Companies

 

 

 

 

 

rise of state capitalism in Russia and China

 

Since communism failed as an economic system, Russia and China have had to embrace free markets. But hopes that reform of communist economies would produce western-style democracies have been shaken.  The new Russo-Chinese model is authoritarian and attempts to marry capitalism with a large state role in the economy. Moscow and Beijing increasingly stress a combination of economic growth and nationalism. Furthermore, the two countries have frequently opposed western efforts to exert pressure on repressive governments such as Iran, Iraq, Sudan and Serbia...

 

 

 

 

Asian countries fight to keep their currencies undervalued vs the dollar

 

This trend of countries in Asia fighting to keep their currencies undervalued has had major impact on the world economy.  China, is of course the major country that comes to mind, but others are doing the same thing.   In order to keep exports competitive, the Asian governments do their best to keep the currency undervalued.  But, with massive amounts of foreign capital coming into the country, these governments are forced to spend that money overseas.  See our discussion on the balance of payments and the Mundell trilemma to see why this is.  But the result of the situation is that countries like China are forced to invest most of that money overseas, and most of which pours into US T-bills.  As they buy up US debt, that helps keep the US borrowing costs to a minimum, so the Fed is able to keep interest rates extremely low.  This is partly to blame for the asset bubble in housing, and the subsequent credit crisis of 2007.  The bigger fear, however, is what would happen to the US economy if China were to suddenly stop buying up all that US debt.  If China were to stop supporting the weak currency by purchasing US debt, then the US would be forced to a balance of payments crisis, unless it would significantly cut back on imports, or expand exports.   For this reason, I suspect that many in Washington secretly are welcoming a weaker US dollar which should help to slowly correct the balance of payments issue (before confronting the Chinese to allow their currency to appreciate).  But, as we mentioned before, Changes are happening in China and it appears as if the Chinese currency will be appreciating soon.  How will this effect the US?  

 

 

 

 

Changes are happening in China

 

In early 2008, we noticed some fundamental changes that were occurring in China, and began to wonder how they might affect global business patterns.  In particular, we are seeing that inflation is ticking upwards, which is making many Chinese made goods more expensive.  Also, the Chinese currency has appreciated and is expected to continue appreciating significantly.  This will also make Chinese exports more expensive on the world market. This might have many significant effects on the world economy, from exporting inflation, to shifting global supply chains.  As the Chinese economy faces down inflation, they have been forced to raise interest rates, which has attracted the desire of foreign investors to invest in China, which would have the effect of pushing the currency even higher, but China is desperately trying to maintain their system of capital controls.  Will this delicate balance last?  Will China slip into recession?  If so, what does this mean for the global economy?  In this section, we invite you to add your comments here...

 

In addition, the Chinese look to be slowing down their purchase of US Treasury bonds (which they were doing to keep their currency down).  How will this effect the US?  How dependent is the US on Chinese capital to fund its current-account in balance?  (remember, the US has a massive current account deficit, but has traditionally had a capital account surplus....thanks in large part to the inflow of Chinese capital).  If the Chinese stop sending their excess capital to the US, will other countries pickup the slack?  Or, will the US be forced to cut the current account deficit (which should happen if the US dollar continues to weaken)....  note:  India is slowing down too 

 

 

 

Comments (1)

clark40 said

at 7:35 am on Feb 18, 2010

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