Wednesday, November 12, 2008

The Chinese Dilemma!

There is an interesting post at Marginal Revolution on Chinese model. Tyler Cowen smartly collects lot of pros and cons on the matter. Yet, this is very critical at this stage.

World economy had predominantly two engines of growth - the US consumer and Chinese producer. Both had second and third order effects that accelerated the economy. Now US consumer is dysfunctional - at least for some time to come. So the world looks at China!

China is also aware of the issue. It wants the huge savings rate to translate into consumption and therefore demand. The only way to get the saving population to start spending and kick-start consumption is to let them buy brands that have build up aspirations in their minds. This will be possible with letting CNY appreciate and letting the products be available freely.

The trouble is this will make non-china manufacturing cheaper - leading to job loss from manufacturing sector. However if China really wants to move to a consumption driven economy then there will be job shift to services and out of manufacturing.

This is more critical now। If China misses a step then we are all goner! The question is will china bite the bullet!
Links:
Marginal Revolution - Tyler cowen - This is another premium blog on finance and economics.