Middle Income Trap Theory Is Not Perfect

Obviously, I’m nowhere near of anywhere to consider myself a knowledgeable person on the topic of economics, and to have myself even consider of dabbling with the topic of world economy is just ludicrous.  Nonetheless, I’m just like any other human who has imperfections, and so let me indulgently dabble with what I want to write next.  I have seen people talk of middle income trap this and that, but the uneducated me think the middle income trap is overrated.

When people talk of middle income trap pertains to a country, they tend to assume that such a country has uncompetitive edge in export market and (has) yet to be able to raise the per capita income level which can break out of the middle income status.  This idea/theory does have some merits (but must include the inflationary rates in the formula).  If a country is losing in export competition around the world and yet the per capita is still hovering around the middle income status, it’s true that such a country can be in for a struggle of improving the country’s economic status and people’s happiness.  Nonetheless, this theory doesn’t work for a country such as China or similar country to China.  Why?

China has 1.3 billion people, and their economy is still the fastest growing economy in the world which hovers around 7% of GDP growth.  When people think in term of percentage for GDP growth, they tend to over-rate the growth percentage.  When China’s economy was way way smaller than Italy, China’s GDP growth was hovering in double digits of GDP percentage growth, but now China economy is the biggest in Asia and way way more bigger than Italy — the GDP growth of China slows down to 7%.  This fact alone can argue that with bigger economic base and foundation, even at 7% GDP growth China can still bring in more revenues as a whole country than Italy can ever achieve even if we see Italy grows at 7% in GDP.  In reality though, if I’m not wrong, in 2013, Italy has around 2.1 trillion dollar GDP economy in nominal term, but the GDP growth is at -1.9% (negative 1.9%).  To sum this idea up, at 7% of GDP growth, China is still growing like she was around 10% or higher, because her whole economy is so much more powerful and bigger.

As China is slowing down in term of nominal GDP percentage growth, the world is fixated with the percentage growth in GDP and wondering if China may stuck in the middle income trap.  Some people, out of ignorance, are definitely loving to use the slowing down of nominal GDP growth percentage for China to make their point that China is going to stuck in the middle income trap if she doesn’t transform herself into a domestic consumption led economy.  I don’t like to delude myself and agree with such nonsense.  Not because I dare to think I’m smart and taking the road that less people walk and say that China doesn’t need to transform herself into domestic consumption led economy, but the facts on the ground are that China is getting richer — meaning when the Chinese average citizens have more money they automatically spend the extra money they have even though they are going to save a lot still.

I think China knows this, and this is why we are seeing China encourages the world to support her in building new land and maritime silk roads.  Instead of implementing policies that would transform herself into domestic consumption led market, China wants to have her cake and eat it too.  In China case, I have a feeling that she may achieve this objective.  Why?  The facts on the ground tell me that China is now the largest trading partner for most countries around the world, and so it’s logical for China not to be stupid and thinking that by letting go the export market and just ramping up the import market will make China richer.  It’s just common sense that I sense China knows this, and so this is why we are seeing China promotes more trades around the world.  The argument that China must transform herself into domestic consumption led is nonsense.  China takes 35 years to build up herself as the largest export trading partner with the world, why would she want to give all that up and get herself into debts by going the hyper-importing route?  The truth is that China is going to import more anyway since she is richer and wealthier, but she is going to do this in a natural manner.  Natural manner?  When her citizens get richer and wealthier, her citizens are going to demand for more import goods naturally with or without the intervention of her government’s import preset models.  One example would be China now has the largest automobile market in the world.

I’m writing this article to argue why people should not think the middle income trap theory is always going to be correct.  To think so would be a delusion.  Who would want to be delusional?  In the end the facts on the ground will always going to be freely available for people to understand.  As long China has the export competitive edge, she is going to be fine even if her per capita income isn’t higher than the middle income status.  Only when China loses her export competitive edge, that is when she finds middle income trap is troublesome.  Nonetheless, China is too smart to fix something that isn’t broken.  The proposal of the new land and maritime silk roads is one of the logical methods of how China is going to build a stronger export foundation to ramp up her future export market.  China is seeing weakness in her export market as the world experiences a big recession.  Europe and America and many other countries around the world are poorer now, thus the export market for China is naturally weaker.  As China is seeing this, she proposes the silk roads and establishes AIIB (Asian Infrastructure Investment Bank) so she can ramp up her export market and maintain her manufacturing hubs and capabilities.  If China is going to achieve this, even if China is still a middle income country for the next ten years, I think China is going to be just fine and her economy is going to grow even bigger than ever before.

China is also a special case in term of her foreign exchange reserve.  China has a surplus of around 4 to 5 trillion dollar foreign exchange reserve, and so she can use this to preemptively stopping weaknesses in her economy.  One example would be funding the AIIB that she is in process of establishing.  Furthermore, China is still pegging her Yuan to the Dollar, and so she can just tweak her currency the way she wants.  By being able to tweak her currency the way she wants, China can effectively control how she wants to get herself out of the middle income trap at the pace that she decides.  How?  By being able to increase or decrease the strength of Yuan according to the Dollar peg, China can dictate how much more stuffs her citizen can afford from import.  Rising Yuan would make her export weakened, but she can afford more from import.  Weakening Yuan would boost her export but weaken her import.  Instead of raising the wages of her people’s per capita income, China can just tweak her dollar currency peg to have the same effects as countries that have already escaped the middle income trap.

As long the United States’ Dollar is still the reserve currency of the world, I don’t think China will unpeg her Yuan against the Dollar.  Only when China can establish her own currency as the reserve currency of the world, this is when China will unpeg the Yuan from the Dollar.  Of course, if this to happen, I think China will be more careful in tweaking her currency and will consider of implementing policies that encourage higher wages/incomes for her people.  Nonetheless, if China’s Yuan becomes a reserve currency, she will have a lot of tools to get herself out of middle income trap easily.  Why?  Because world reserve currency has a lot of power!  The power to affect trade and world policies are two examples of a country that has her currency as a reserve currency for the world.  With huge export capability and manufacturing power, a Yuan currency reserve for the world will make China unchallenged for decades to come.  Nonetheless, it’s not that easy for just any country to turn her own currency into a world reserve currency, and the United States is going to challenge such a country for sure if that is going to happen.  I think we are going to see China and United States compete in currency arena for some time to come, because I think China is challenging the United States’ world currency reserve status as we speak.

Can Higher Wages Grow An Economy?

Around the world, China is increasing her presence as we speak.  As China grows her global presence in geopolitics and world economy, competitive countries such as the United States have to worry about the future in which China will have more influence in all things global.  If China is going to be too dominant and overtaking the United States in the influence of global affairs, the United States may have to find ways to cooperate with China.  If the future isn’t about the cooperation of the two biggest countries in the world in term of economics and raw power, then the future is certainly going to be very grim.  How grim?  Perhaps in such a grim situation, the grimmest outcome might be of a zero sum game.

I can’t imagine the kind of hell that a zero sum game is going to be waged by the two most powerful countries in the world in a nuclear age. The implication of such a zero sum game in our time is definitely scary.  If the United States and China are going to have a hot war in the future, both United States and China will force other countries to take side.  This means we might have a new world war if the two most powerful countries in the world are going to have a hot war.  Any sane person in my opinion would not want to witness a hot war between any two most powerful countries in the world, and so I think it’s very important for us humans to push for more cooperations to weed out the warmongers among us.  In order for one society to cooperate with another, we need to understand each other.  This means, the people in the United States need to understand more about China, and the people in China need to understand more about the United States.  I believe more cooperations between the two giants of the world can only bring more peace and prosperity to the rest of the world.  Most importantly, the cooperations between the two giants can also raise the quality of life for the people who are living in both countries (i.e., China and the United States).

In the video right after the break, professor Yasheng Huang gives a lecture on how capitalism has been developing in China, contributing to the huge growth of the Chinese economy that we’re seeing today.  I think his lecture is profound. In the lecture, he honestly points out hidden problems that are existing and may exist within China.  This means being a big country such as United States or China doesn’t mean big challenges are not there.  In fact, I think the bigger the country the bigger the problems are going to come out of the woodwork.

In the video, professor Yasheng Huang insists that personal income dictates the real wealth of a country.  He mentions how desperate a banker can become if regular people cannot afford to spend or buy house.  By this he implicates that the regular folks are the healthy roots that hold the strong economy together.  If regular folks cannot afford to spend on necessary things and housing, then businesses and housing construction have to slow down.  This means the bank institutions become poorer as people won’t have money to spend and deposit and businesses won’t have money to pay back loans and whatnot.  The real economy will decline if the everyday people cannot afford to spend on important things such as housing.

Personally, I partly agree with professor Yasheng Huang on the point that everyday folks with higher wages can grow the economy.  Nonetheless, I think professor Yasheng Huang needs to also lecture on how inflation can play a pivotal role in dictating the real strength of the personal income.  Inflation is very important in my opinion, because personal income can either be grander or weaker depends on the inflation.  For an example, one dollar can purchase a cart of lollipops yesterday but can only buy one lollipop today has great effect on how people spend their personal income to grow an economy.  In fact, I think a growing economy is the result of many positive economics factors, and the optimization of the balance of personal income and inflation is one of those very important, positive economics factors.  This is why I think China is not only wanting to grow her economy in quality and quantity, but she also wants to control her inflation in a way that it makes sense for everyday people in China.

Since we’re living in a global market, inflation can be exported and imported.  This means inflation policy in influential countries such as the United States can have great implication for the inflation in China.  Currency war is one of the tools that a country can use to import and export inflation.  If the United States imports inflation by weakening her currency exchange rate to promote export competitiveness, she can induce high inflation in China for China has accumulated United State’s treasury bonds over a trillion of dollars.  Simply put, if United States weakens her currency can induce China to mimic the United States’ inflation policy to keep China’s export market and United States’ treasury bond value up.

Nonetheless, weakening one own country’s currency to induce higher inflation means to weakening the personal income of everyday people.  I think currency war is going to hurt the everyday people a lot more in the end.  I know China knows this, and this is why we’re seeing China is gradually moving away from accumulating more treasury bonds from the United States.  Nonetheless, by doing this China can push the United States into hyperinflation as the dollars cannot find a home abroad.  More dollars will rush back to the United States, pushing the inflation to the unstoppable rate.  If this to happen, the United States economy will crumble as the everyday folks will not be able to utilize the dollar for purchasing whatever at a hyperinflation exchange rate.  Of course, the United States can reduce the inflation rate by buying up the treasury bonds herself and introduce higher interest rate, but this will make her already huge national debt harder to manage.  As right now, according to usgovernmentdebt.us website, United States’ national debt is at $18,176,295,505,000.  It’s a very hard situation for the United States to be in.

But can we really blame China?  China is also wanting to balance her inflation at a sensible rate that can help induce her own economic strength!  I don’t think there is an easy solution to the ever struggle between countries’ inflation import and export.  I guess in the end, it’s the local economy strength that helps a country to weather the inflation storm.  To fight insensible inflation rate, I guess a country needs to have strong employment and high personal income wages.  In the end, I think professor Yasheng Huang is onto something here, because I agree with professor on the importance of higher wages for everyday people.  Professor Yasheng Huang also emphasizes on the importance of building human capitals, but I guess you have to watch the video for the details as I’m going to end my blog post here.

Is It Wise For The United States To Pivot To China?

Is it wise for the United States to pivot to China?  This question is so important in our young century, because we’re talking about the conflicts of the two most powerful nations of today time.  Once again, I like to use ancient history to reveal what we might face in the future.  Of course, ancient history doesn’t have a crystal ball to predict a future in which such a future is way different than anything ancient history could ever imagine.  Nonetheless, ancient history was the product of humans.  Thus, we can safely assume no matter how different the future will be, ancient history might get it right still.  Of course, unless the future is not a product of humans but of aliens, then I won’t bet my farm on ancient history at all.  (I don’t really have a farm!)  What ancient history I’m talking about?  Read on and I expand…

I watched a YouTube video, The Phoenician Carthage – The Roman Holocaust, in regarding to how Carthaginian empire was toppled by the Romans, and I was very intrigued to how United States and China are facing a very similar Carthaginian versus Romans picture, in the big picture of course.  I may get this wrong, because I’m no expert in ancient history of Carthaginian versus Romans.  Nonetheless, from what I’d learned from this YouTube video, Carthaginian empire was a superpower way before Rome became one.  Carthaginian controlled the nearby sea trade routes, thus Carthaginian empire was also an ocean going superpower just like how United States is today.  Meanwhile, at the time when Carthaginian ignored how Roman state was on the rise in term of ground territorial expansion, Carthaginian thought nothing of Rome until sometimes later this would prove to be fatal for Carthaginian empire itself.

Sometimes later, Roman state slowly took up form of an empire, albeit a much smaller one than Carthaginian.  As Roman empire began to expand even more, it faced an obstacle which was the Carthaginian empire.  Carthaginian controlled much of the sea routes for trade, and the Romans wanted a piece of that.  I don’t think I can be wrong on this, after all — wars of our time, meaning now or even in the past, were and are mostly about victories over trades, territories and whatnot.  Since the Roman state was on the rise to become an empire that rivaled the Carthaginian empire (eventually surpassed the Carthaginian empire), thus the two superpowers of their time began a series of conflicts that led to three major Punic Wars.  I’m not an expert in Punic Wars history, thus I couldn’t go into the details, but I know few things about the conflicts of Carthaginian empire and the Roman empire that I can use to compare the two superpowers of today, the United States and China.

At the start of first major Punic War, according to Wikipedia’s “Punic Wars” piece (source link: http://en.wikipedia.org/wiki/Punic_Wars), the Romans wanted to expand to Sicily and was presented with an opportunity when a local conflict in Sicily broke out.  Whatever the details were, the local conflict in Sicily became a proxy war for Carthage versus Rome conflict.  Eventually, the proxy war enticed the two superpowers into an all out conflict, resulting in the first Punic War.  Wikipedia details that at the start of the first Punic War, Carthaginian was at a disadvantage on land warfare for Roman state was originally expansionary through land warfare, thus the Romans defeated Carthaginian at the Battle of Agrigentum in 262 BC.  With such a harsh defeat, Carthaginian decided to avoid most land warfare against the Romans and preferred to fight on sea.  Since the Roman empire was not strong at sea, thus Carthaginian empire was able to take advantage of Romans’ sea weakness.  The YouTube video I watched describes after a major defeat on sea, the Romans were lucky to capture a Carthaginian battleship which then later the Roman empire was able to duplicate such battleship technology to revert the tide of war on sea.  This is important for my thinking of the current conflicts between the two superpowers of today.

Today, the United States is still the undefeated champion on sea, and China is largely a powerful land based force.  Obviously, it’s less true than before as China is rapidly developing a huge professional navy with capable battleships and whatnot to deter United States from getting too close to her shore.  Just as how Carthaginian versus Romans, United States is facing a rising China in which China has overtaken the United States in world trade.  Since Carthaginian was facing a hungry Romans in trade and territory domination, the first Punic War between these ancient superpowers was becoming inevitable.  Can we say the same for the United States and China?  Once again, not so different from the Punic War conflicts, contemporary superpowers are emphasizing their face-off on sea.  China needs to control sea routes for trades and the United States does not want to be pushed out of the Pacific, thus the stage is setting up for a future sea confrontation.  Modern Punic Wars?  Who will be the Carthaginian and who will be the Romans this time around?

According to ancient history, Carthaginian empire was a superpower at sea.  Today, the United States is also a superpower at sea.  Romans stole Carthaginian’s battleship building technology, and was able to turn the tide for the ancient battles at sea.  United States and China have yet to go to war on sea, but China is hungry for better sea warfare technology.  Carthaginian didn’t want Romans to expand and capture ancient territories that could dictate favorable terms for trades such as important sea routes.  United States definitely does not want China to control most sea routes, because that would push United States out of Pacific, making United States becomes irrelevant in a modern, most profitable sea-trading territory in the world (i.e., Pacific ocean).  United States for sure knows that China is a very capable land force, because China has huge population to prepare a huge ground force invasion.  In ancient time, Carthaginian relied on mercenary for their army, but the Romans relied on native population for their army.  Today, United States does rely on mercenary more than China for obvious reasons.  One such reason is that China is not in as many conflicts as the United States, and the United States is facing too many conflicts around the world such as in the Middle East.  I’m living in the United States, and I feel it’s a poor taste of me to compare United States as Carthaginian empire and China as Roman empire.  Nonetheless, the picture of the ancients somehow reminds me of the picture of today.  Very freaky in my opinion.

Of course, one big difference of today world is that we are in a nuclear age, thus Carthaginian versus Roman conflicts might be irrelevant for warfare lessons since nuclear weapons can make sea warfare struggles become rather irrelevant.  Really?  What about submarines with nuclear warheads?  Isn’t this scenario all about using the sea to gain victory over the enemy?  Thus the oceans are still important in warfare today, and the oceans are still practically important to how we do trades today.  I think if we can go on without having sea conflicts between United States and China in a major way that might result in modern Punic Wars, then we might make to the space age.  Only in space age where trades take place in space that we might find conflicts on sea become less relevant.  Nonetheless, I don’t bet my farm on this, because nobody knows the future.  Even though the ancient time can remind us a familiar picture of the past, it doesn’t mean the future will unfold similarly.  Nobody knows really!  Nonetheless, history can be a great teacher in that the fundamentals won’t just become the aliens overnight, thus the human products of ancient history will probably be somewhat similar in contemporary age.  Thus it begs the question, is it wise to have modern Punic Wars?  Is it wise for United States and China to have conflicts at sea?

It was how Romans defeated Carthaginian that built the Roman empire into one of the most glorious ancient empires.

Sources:

Mutual Assured Destruction For Participants Only

In a nuclear war, a nuclear capable country that got hit first would like to retaliate with nuclear bombs and missiles, but the retaliation capability might not be available if the first preemptive nuclear wave is all it takes to clear out the necessary infrastructure for a retaliation to take place.  I’m no expert in this matter, but it’s commonsense to think that the first nuclear wave is meant to take out the enemy’s nuclear retaliation infrastructure.  Nonetheless, let’s assume a fictional scenario in which the first nuclear wave failed to take out an enemy’s nuclear retaliation infrastructure, and so the retaliation wave was retaliated.  For an example, submarines with nuclear missiles and whatnot could be used for a nuclear retaliation in a nuclear war.

I can imagine how fast things might be happening when a nuclear war breaks out.  Nonetheless, let’s assume a fictional story in which United States saw the first nuclear wave came from Russia, and so the United States launched nuclear missiles and bombs toward Russia for a retaliation.  During this scenario, other countries that had yet to participate in the conflict were horrified at the scenario.  Nuclear capable countries that had yet to enter the conflict decided to sit out and watch United States and Russia became radioactive.  They were not prepared to see their people got involved in a nuclear war.

As Russia and United States became radioactive, the countries that sat out of the nuclear war became even more convincing that they would sign a peace treaty with the rest to see nuclear war would not break out again.  In the end, United States and Russia were the only two countries that got radioactive.  The people in both countries were nuked to a point of no return.  Meanwhile, China and the rest were quickly assured the world that they would do everything they could to help out Russia and United States in whatever fashion for whatever left in both radioactive countries.

Although the scenario I just described is fictional, I don’t think for a second that it’s impossible for such a scenario.  In this strange world of ours, even something nasty as nuclear weapon is possible, how can we think the scenario I described is not possible?  Contemporary speaking, United States and Russia are in each other’s cross-hairs.  As the conflict between United States and Russia heats up, the nuclear war scenario between both countries may enter our thoughts.  However far-fetched things seem as United States and Russia battle each other out for energy supremacy and whatnot, let’s hope both countries will be sane enough in the end to strike peace arrangement somehow.  After all, both countries cannot go all out, because nuclear war is the last resort in which nobody wants to see it happens.

I think many people may think that when a nuclear war happens, the whole world will be damned by nuclear bombs and whatnot.  Nonetheless, perhaps by witnessing the first and second wave of nuclear attacks by the countries that carry out the nuclear attacks, the bystanders might just as well be bystanders unless they see nuclear bombs and missiles head their way.  In conclusion, I think nuclear war will result in a mutual assured destruction for the countries that are going to be responsible for a nuclear war, but the world won’t go nuclear winter.  The losers of nuclear war are going to mutually assured destruct themselves, but the world will standby and watch till the dust settles.  After all, why would any sane country want to see a population gets nuke out of the existence?

Clear Cut Divided World May Lead Countries Into Radioactive World War III

A war can break out for all sorts of reasons.  Sometimes, a war can just start by a strong mind leader who has a lust for wars.  Nonetheless, in a complex world of today, albeit wars might occur for the reasons that nobody will ever be able to guess, I think a global war might occur easily if the world is so clearly divided.  What do I mean by this?  Read on and I expand on this further…

Well, if the world is so clearly divided in a sense that a world is splitting into two groups — each group consists of friendly countries that are so ready to defend one another — I think this configuration for the world will easily ignite a global war.  How come?  You can call it as domino effect or a string effect or ally effect or whatever, but the reality is that this sort of division in the world will encourage one country to go to defend a friendly country with little hesitation.  Although, defending a friendly country is a noble deed, but when the world is so clearly divided into two groups, many countries may tend to look pass the diplomacy and pour resources into war preparation instead.  Of course, if a country wants peace, it must always be ready for war.  When a country is so war ready, it’s very unlikely to be considered as a weak target and will not easily be bullied or taunted into a possible war.  Nonetheless, war preparation is not the same as war preparation with clear cut global division.

When we have a world with clear cut global division, countries that are grouped together and war ready will find themselves to be overly confident.  Overconfidence may lead into pushing diplomacy aside, thus war preparation might just become preemptive strikes.  Perhaps, preemptive strikes come in all sort of forms, and eventually the physical form of war might just become a reality.

In today world though, we have nuclear weapons, thus even with our current clear cut global division world, I doubt that a global war such as World War III will easily erupt.  Nonetheless, if certain countries that are able to find a way out of (MAD) Mutual Assure Destruction situation, then a clear cut global division kind of world, even with nuclear weapons, will find itself embroil in a global war.

I think the world we are currently living in is a dangerous one.  It’s clearly that China is a rising global power, and some people even consider that China is already a super power.  Whether China is a super power or not, it does have more allies than before for China is growing in military and economic strengths.  Furthermore, with China’s advancements, many countries are rethinking about their strategic friendships.  With more countries are willing to be under China’s global influences, this will put United States in a situation which will be very uncomfortable.

Of course, United States can follow Britain’s playbook.  In the past Britain conceded its global power to the United States in a way that it did not wage war against the United States.  Of course, the British did attack the United States when the United States was still a colony or sort of.  Nonetheless, the United States declared independence from Britain, and when the dust was settled Britain did not try to invade the United States again.  After World War II, Britain conceded her power to the United States.

Another option for the United States in the face of China rising is that doing everything it can to disturb China’s rise.  The eventual outcome of this option will not be clear for obvious reasons.  One obvious reason is that nobody can be sure that the United States can contain China, because China is economically strong and militarily ambitious.  Furthermore, China is one of those countries that can use the MAD strategy.  With modern nuclear weapons, China can deny a potential enemy from being too aggressive against China’s core interests.

As China is ambitiously rising, the United States is embroiling in economic downturns and global enemies such as Russia and other players in the Middle East.  While the United States is clearly wanting to contain China somewhat, but the United States is having her plate full.  With a full plate to deal with, containing China will not be easy for the United States.

Since China is knowing that the United States is trying to contain its ambitions, thus China is working in a direction in which will not be favorable for the United States.  Furthermore, China is now working ever closer with Russia, thus the United States will have to find other allies to counter China Russia combination.  Nonetheless, China and Russia are creating their own organizations that allow even more countries to join such organizations, and so the world is becoming evermore clear cut divided.  The world is definitely being divided by United States and China.

As the world is being divided by two most awesome countries, United States and China, many smaller and weaker countries will pick side.  Some countries will try to stay neutral, but for how long?  What if China or United States wants such neutral countries to pick side at all costs, can such neutral countries stay neutral?  For an example, United States and Europe and Russia want Ukraine to pick side!  The original government of Ukraine wanted to go with Russia, but it got overthrown, and now the newer government wants to go with NATO (Europe and United States).  Nonetheless, I doubt Russia will approve of that and will do everything it can to prevent something like that from happening.

In conclusion, my theory is that if MAD isn’t useful anymore, a clear cut global divided world will find itself embroiling in global war.  Perhaps, we can call such a war a World War III.  Cliche or not, it’s a war that I do not want to see it happens.  After all, the next global war might push countries with nuclear weapons to go nuclear.  Modern nuclear weapons are way more powerful than the ones that the United States had dropped on Japan, and so I think we should be fearful of the next global war.  Instead of millions of deaths, we may witness hundreds of millions of deaths for the next global war.

Can the United States’ high inflationary and low interest rate policies help China to grow even more?

Can the United States’ high inflationary and low interest rate policies help China to grow even more?  As we know how the United States is trying to keep the inflation rate high and interest rate low to promote consumption spending and bring in more revenues for government agencies.  United States is doing this while also cutting back some spendings in general, because the United States needs to deal with both huge foreign and internal debts and the interest of the foreign debts.  As United States prints more money to keep inflation rate high, this affects China’s inflation rate big time.

Why?  China’s Yuan is still pegging to the Dollar, and so China’s inflation rate is probably shooting up really high when the inflation rate in the United States skyrockets.  As China’s middle class is growing in astounding number, China’s middle class is sure to have a lot of cash to spend.  Although Chinese tradition is to save more and spend less — Chinese had been poor for a long while since the downfall of China’s ancient kingdom and during Mao’s time — with more money Chinese people are sure to be able to afford better modern accommodations.  As in the United States, high inflation may encourage Chinese to spend more since they may fear that prices are keep climbing for the accommodations (e.g., household items, cars, furnitures, electronic items, smartphones, etc…) that they need.

In the time that the Chinese are having a lot of money, they are sure going to spend for whatever that they must have and need. With the high inflation rate in China to boost the domestic Chinese consumers to spend even more, Chinese internal market may heat up even more and growth in consumption may as well skyrocket.  This in turn will boost firms and companies from abroad to bet even bigger on the Chinese market as Chinese market is set to grow a lot higher in term of consumption lead.

Unlike the United States in term of forgoing home manufacturing capacity, China may boost consumption even without letting go home manufacturing capacity.  Why?  Out of 1.4 billion of people or so, if I’m not wrong on this China’s middle class is roughly around 300-400 million of people or so, and so around 1 billion more Chinese are still working their way toward becoming the new middle class citizens.  With so many more Chinese that aren’t yet achieved the middle class status, they’re sure working hard in the home manufacturing based entities/market in hope of making a better living.  This is why China may not yet be able to forgo the home manufacturing capacity for cheap labor is still possible in China’s poorer areas.

Meanwhile, China may try to boost their service sector to grow even more to compete with foreign service industries.  On the top of all of that, China doesn’t need to print so much money as the United States to boost inflation rate, because the United States’ inflation rate alone is already pushing China’s inflation rate up. I think China’s market will grow even more as the United States prints more money to boost the inflation rate at home. The question is if the United States decides to tapering, what will happen to the markets and economic growths in China and the United States?

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