The central bank of China declared over the weekend that its biggest banks must hold more cash in reserve, the fourth time in 2011 the reserve ratio has been increased. China’s financial leaders are struggling to keep inflation in check. A world addicted to cheap manufactured goods from China could be in for a shock. A 25 percent tariff on Chinese imports is the solution floated by Donald Trump, whose attempt to score points with such a canard has inspired laughter among the cognoscenti.
Economy is not growing the way the government wants
By requiring that banks once again raise their deposit reserve ratio, China’s central bank has been trying to cool down the nation’s overheating economy by raising interest rates and reducing the amount of cash accessible for loans. The announcement came on the heels of a government report that China’s economy has been growing at an annual rate of 9.7 percent, the most rapid pace in the world. The government is very unsure about the rising prices which this growing economy has brought on. The price for food or for gas went up a lot. Also, the home costs have become too high. Chinese businesses were told not to raise costs by Beijing while agricultural subsidies increased to stop the price increases. Citizens in China also got wage raises. That means the inflation program is just going up.
China inflation a global threat
Too much of China’s economic growth, according to analysts, is due to inflationary government spending on real estate development and multi-billion dollar infrastructure projects for instance roads and railways. Some predict that in spite of the government’s tries to douse the flames, China faces a rate of inflation approaching 5 percent for the next decade. With this inflation rate like this, China may have some difficulties. It might not end up dominating manufactured goods anymore. As Chinese wages and production costs rise, companies are asking higher costs for goods shipped overseas. Other economies may start to sell cheaper goods to big consumers for instance the U.S. and Europe. A contracting Chinese economy could hurt lots of businesses that count on China. This would consist of both General Motors and General Electric.
All the pressure
China has failed to stop the economy from overheating. Now, the pressure to have the yuan to rise in value is coming down even harder than ever on Beijing. It was suggested by Donald Trump that a tariff be put in place. This would be on Chinese imports at 25 percent. However experts say tariffs are a flawed response to China’s currency manipulation. A trade war between the United States and China would likely begin if there was a tariff started by Trump. A 25 percent tariff would make Chinese goods American consumers depend on more expensive, feeding United States rising prices. The United States is probably not able to trade with the United States anymore if China got angry over it. A Chinese appeal to the World Trade Organization would get rid of the tariff quickly anymore.
Articles cited
New York Times
nytimes.com/2011/04/18/business/global/18yuan.html?_r=1&emc=eta1
Associated Press
money.msn.com/business-news/article.aspx?feed=AP&date=20110418&id=13322016
CNN Money
money.cnn.com/2011/04/17/news/economy/trump_china_trade_war/index.htm
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