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  • Real Change, Not With China

    Posted on July 28th, 2009 Michael No comments

    In Barack Obama’s two day meeting with Chinese officials, I do not expect much on the economic front. Nothing with China will change much unless their government does more to stimulate domestic demand.  As I wrote in a previous post,, on Chinese consumption, China is very limited to making economic changes while they are so heavily reliant on export lead growth.
    Recently, China has made some movement in this area.  For example, the reduction of taxes on fuel efficient vehicles has significantly stimulated domestic demand.  Unfortunately, this is just a drop in the bucket when compared to the overall economy. 
    Even with China’s relatively large stimulus package, the current recession has lead to the loss of over 20 million jobs and the closing of thousands of factories.  There is also a massive amount of bad loans being maintained by government controlled banks.  This limits China’s willingness to make any significant changes to the status quo. 
    China is in a rough spot. China needs to continue to buy U.S. debt so the value of their current U.S.  investments do not lose value.  To continue to buy U.S. debt they need economic growth.  To get the growth they need export growth.  For China’s exports to continue to grow, they need their largest customer, the U.S., to continue buying their products.  To keep Americans buying, China has further incentive to buy U.S. debt.
    For our part, the U.S. relies on the Chinese buying our debt.  This handcuffs us in the level of action we can take against China.  We are virtually powerless in our ability to stimulate the Chinese consumer.  The best we can do is to wait for China to do it themselves.

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