Home >> United States & Canada >> Economics & Trade

     Email   Print 

Global Economy: Recession in America , Inflation in China

Bhuwan Thapaliya - 2/22/2008

Possible fear of Recession has created panic in America as its economy is in doldrums, whereas China is trying hard to cool its economy from overheating as inflation lurks in.

China’s inflation rose to its highest level in more than 11 years in January, according to the reports.

Consumer prices in January soared to 7.1 percent from the same month last year, stirred by an 18.2 percent rise in costs, according to the National Bureau of Statistics.

That’s a mammoth surge in price. But wait, China ’s inflation rate is abnormal given the fact that its non- food inflation rose by only 1.5 percent in January from 1.4 percent in December according to the reports.

China’s inflation is fueled by agflation – a massive rise in food prices. The price of food has soared so much in China that the price of pork, was up 58.8 percent from January 2007.

What are the causes of this massive agflation?

The list could go on and on but the Chinese authorities have jettisoned all their blame on the weather.

Remember the severe winter weather that swept southern China last month and spread its negative chain reaction all over the country. The worst snowstorms in decades in the history of China , crippled the movement of people, disrupted transport links, damaged crops, killed animals, destroyed houses, and deteriorated the market channels.

However, according to the experts this very agflation led inflation which the Chinese are suffering from is not only due to severe weather.

There are many causes of this massive rise in food price. For example, fluctuating feed grain costs, swine diseases and the low prices in 2006 that discouraged farmers from rearing hogs, according to the media reports.

Meanwhile, some economists have showered their anger on the appreciating Yuan too.

The Yuan has risen by 13 percent against the dollar since 2005. And what has this done? According to them this has made the imported goods cheaper and reduced China ’s trade surplus and this prime source of excess liquidity they say is promoting inflation in China today.

Chinese unique model of liberalization, which involves preserving solid political power, and control by the Communist Party while allowing permissive state and then private commerce to develop on its own, has been a huge economic success story.

With a healthy economy and, of late, a government getting down to business, China ’s recent high growth rates have stunned the world.

In the year 2007, China ’s GDP growth was 11.4%. But analyst say, this very growth rate along with high inflation could further complicate Beijing ’s efforts to keep the fast- growing economy from over heating.

Will China let the dollar off the hook? No. Popular indicators suggest that Beijing is more likely to let the Yuan rise faster against the dollar. That could make Chinese products more expensive abroad, reducing the flood of export revenues that are adding inflationary pressures in the economy.

And as a blessing in disguise this might help the American manufacturing sector which has been hardest hit by the recession.
There's no doubt that the manufacturing sector of the US economy is now in recession. Output in manufacturing has been waning. Manufacturing employment and the sales of manufactured products has reached its nadir.

Meanwhile, Inflation in China is likely to linger on because of the rapid velocity of the money circulation and the rise in raw material costs across the borders.

Analysts say this mounting concern over inflation poses a tough policy challenge for China 's leaders, who are eyeing the Olympic Games in August to showcase before the world their economic stability in the midst of global economic downturn.

But I think China doesn’t need an Olympic Games to showcase their stable economy. It has already presented before the world its economic credibility’s.

“If China falls then along with it the world falls,” this is not a mere hypothesis but a probable economic reality of the 21st century.

Contemplate over this fact: China is investing all over the world and likewise the whole world is investing in China . Most of the major US companies are already in China . And why are they there in China . The answer is simple: These companies believe that investment in China today will find that in the years to come their investments will prove productive because when it comes to manufacturing, production and bringing projects to conclusion, today China has to be rated among the best in the world.

However, the things that are lacking in China are transparency and freedom. Constant human rights abuses and some of its undemocratic activities have abstained more foreign investors from investing in China .

These foreigners prefer to invest in another rising giant of Asia – India , which is transparent, free and democratic.

But the fact that more and more American and European companies are already operating or are all set to explore in China , shows that China is viewed by these companies as a reliable and flexible entrepreurial partner.

China’s long tradition of the Communism is surely but surely fading. Now, it practices liberal economy, who knows tomorrow it might practice liberal political policies too. Who, in their right mind, have thought few decades ago that China would be implementing a liberal economic policy in the future? But it happened and today China is one of the economic power houses of the world.

Thus, one can well doubt that a hyper agflation would dismantle the China ’s soaring economy as its western friends like to think. But it is unlikely anyway. Food prices have not risen only in China . Other Asian countries are also facing the heat of the inflation.

Inflation in Singapore is at a 25-year high and Vietnam is also suffering from agflation—food prices are up by 22% year-on-year.

Not only in Asia , food prices are rising all over the world since 2005.

“In real terms, food prices have jumped by 75% since 2005. The Economist's food-price index is higher today than at any time since it was created in 1845,” according to The Economist.

Meanwhile, there is always this America factor for both happiness and adversary all over the world. Though there exists no direct link between agflation in China and America ’s ethanol subsides, but its indirect impact, however, couldn’t be ruled out.

“The rise in global food prices is also the self-inflicted result of America 's reckless ethanol subsidies. This year biofuels will take a third of America 's (record) maize harvest. That affects food markets directly: fill up an SUV's fuel tank with ethanol and you have used enough maize to feed a person for a year. And it affects them indirectly, as farmers switch to maize from other crops. The 30m tonnes of extra maize going to ethanol this year amounts to half the fall in the world's overall grain stocks,” according to the Economist.

Meanwhile, luckily for China , American recession and the global economic downturn could automatically stabilize the Chinese economy provided the global downturn is not prolonged.

China is an exporting nation and it earns a lot from exports. Hence, a minimum external demand decline might go a long way. A minimal declination dose may be more than enough to stop the economy overheating and curb inflation, allowing China ’s remarkable run of growth to continue at a more sustainable rate.

Hence, will the US economic recession benefit China ? Yes, to some extent in the short run but certainly not in the long run. Lately China is desperately trying hard to cool down its over-heating economy but to its dismay it has not been able to do so even after the implementation of various measures.

Considering this, if US economy goes into recession, then this could slow the pace of the Chinese economy as America is one of China ’s major trading partners. This is what the Chinese government is hoping. But this may necessarily not be a good thing in the long run with no increase in real economic production.

And there are every chances of the Chinese government hope being just a hope because according to the reports, during the 2001 American recession China’s GDP slowed very little and in the year 2008, analysts expect the Chinese economy to spread out by around 8-9% even if China’s major export growth depreciates.

But analysts reckon the America ’s recession this time is likely to cut deep and leave some economic stain than in 2001 as Chinese economy is now more integrated with the global economy. A ray of hope, perhaps, for the Chinese policy makers, who are finding it difficult to cool the engine of their economic motor.

All of which points to the difficulty that the Chinese policy makers are facing today, of curbing the inflation while trying to cool off the economy from overheating.

The biggest problem is that the West still views the China ’s stunning economic growth very differently. The worry remains that even if China curbs the inflation, and saves its poor people from starving, it may still be accused of depreciating the values of the dollar and the pound sterling.