If Only We Had China’s Problems

The lead article in today’s New York Times, “China’s Inflation Poses Big Threat to Global Trade,” describes that nation’s main economic problem, a problem that would be a blessing to the United States — its economy is growing too fast. Posting an expansion rate of 9.7 percent, China’s main economic problem is runaway inflation. Food and property prices are soaring, posing a threat to social stability at a time when the Chinese government is nervously eyeing rebellions against authoritarian government in the Arab world.

To try to counter the inflation, the Chinese increased the reserve ratio for its major banks, thus taking more money out of circulation. But there are other countervailing pressures — in order to reduce the income gap between the rich and the poor, as well as urban versus rural areas, the Chinese had also raised the minimum wage. This, in itself, leads to higher inflation since it means people have more money to spend.

The inflation combined with higher wages also makes Chinese products more expensive, and that endangers global trade. Major international corporations have established subsidiaries in China due to the cheaper cost of producing goods there — when those circumstances cease to exist, it affects everyone.

So the Chinese resurgence that people in the United States have started to fear so much may be undergoing a bit of a hiccup. I think the next few months to a year will be crucial in determining how the Chinese economy performs.