India vs China - Is the Chinese economy in worse shape?

[gorah_pindu]

'The Writing on the Wall' by Will Hutton After reading this book, I am left with two impressions about the Chinese economy: 1). If India was to stop growing, it might be a setback, but if China was to stop growing, it might be a disaster. 2). The Chinese economy as it is right now, is deeply flawed, and will collapse if no change is made. Ill give you an example of the sort of deeply screwed up situations I am talking about: In order to keep the Chinese currency undervalued, to sustain export growth, the Chinese buy foreign currency reserves at a rate of two hundred billion dollars per annum. But, for every two hundred billion they buy, up to seventy billion could simply dissappear when China is forced to finally float its currency - i.e. like 40% of their foreign reserves would be written off overnight. And thats just the tip of the iceberg - I know that when some economist says that India's soft infrastructure is far better than China's, many people take this with a pinch of salt, thinking it dosent really matter compared to their leadership in hard infrastructure - but soft is perhaps a misnomer, because in some ways, it is more important to the long term success of an economy. I can see why some people choose to declare Indian advantage in the long run.

[CC1981]

But, for every two hundred billion they buy, up to seventy billion could simply dissappear when China is forced to finally float its currency - i.e. like 40% of their foreign reserves would be written off overnight.

Pardon my ignorance...but why is that so ?

[gorah_pindu]

Pardon my ignorance...but why is that so ?

This is because a currency re-evaluation would raise the Chinese currency against the dollar - rendering the money they have stockpiled in dollars less valuable. They are forced to keep buying reserves out of fear their mess of an economy would stop growing, but will need to eventaully re-evaluate - the longer this continues, the more they will lose. And this is due to typical commie centralized mismanagment.

[CC1981]

This is because a currency re-evaluation would raise the Chinese currency against the dollar - rendering the money they have stockpiled in dollars less valuable.

Huh ? nevermind. I am clearly out of my league here. What you said made no sense to me. I guess i need to be better versed in economics to understand these.

[gorah_pindu]

Huh ? nevermind. I am clearly out of my league here. What you said made no sense to me. I guess i need to be better versed in economics to understand these.

Im no economist myself - if I can get it, you can. Basically, currency can get more valuable or less valuable, depending on a number of factors. If one currency becomes more valuable vs another currency, then that currency can buy more of the other currency. China currently keeps its own currency artificially low, so that its cheapness will allow foreigners to buy more Chinese goods at a cheaper price, fueling industry. This cant go on forever, because things that China buys with a lower currency are artificially more expensive, and other problems are created. Foreign currency can be stockpiled by a country, so that if the currency was suddenly re-valued, the country with the stockpile would still have a stable currency to buy supplies like food with in emergency. China has to buy US dollars into its stockpile, in order to keep its own currency artificially low - but, when the Chinese currency is eventually set loose, it would gain value - rendering the currency they have stockpiled less valuable - effectively destroying wealth. In other words, it is like buying tons of goods at a really high price, knowing they will be 50% cheaper in a week - you are effectively destroying 50% of the money you just used. Except China is buying money at a high price - money that will become much cheaper in future when they are forced to raise the power of their own currency. And they are buying a lot of money - $200,000,000,000.00 per year. This is only one example of the vicious cycle they have worked their economy into.

[gorah_pindu]

Check out this article

[theguyinallblue]

japan also has a huge $ reserve ? i find this economics and trading thing an interesting topic.. only if some one could publish a book for dummies..

[gorah_pindu]

'The World is Flat' by Thomas Friedman is a good book to start on if you dont know anything - thats what got me interested, after wanting to know more about the Indian economy and globalization. After that, try Amatrya Sen's non-economic books, like 'The Argumentative Indian' (damn good read, kept me hooked) and then other stuff.

[gorah_pindu]

Another example of bad economy: China's healthcare system is absymal - it is ranked behind India, Indonesia and Bangladesh. In terms of fairness, it was ranked 188th in the world, behind India, which is 42nd in the world.

[theguyinallblue]

Thanks GP... will search for it on google...:-D somehow..i am very very paranoid about anything chinese... they are bloody snakes... they play a lot of games ... who knows...whom they can use for their gains..

[dial_100]

In that case.... they have biggest fear from us. If we continue to influence $ value for two decades from now, their reserves will get a big hit? Isn't it? But thats hard to say. Boy economics is one heck of a subject...

[gorah_pindu]

Their problems are entirely their own fault - they are typical communists, just like the ones in India - they dont want to let go of their ideology - all their problems could be solved, but it would mean giving up their dictatorship, giving up their communism, and letting people have more power.

[Mandrake]

'The World is Flat' by Thomas Friedman is a good book to start on if you dont know anything - thats what got me interested' date= after wanting to know more about the Indian economy and globalization. After that, try Amatrya Sen's non-economic books, like 'The Argumentative Indian' (damn good read, kept me hooked) and then other stuff.

A great book to learn Economics basics is "A Beginner's guide to world economy" by Randy Charles Epping. Havent been able to read it fully but very lucidly written.

[Ram]

Foreign currency can be stockpiled by a country, so that if the currency was suddenly re-valued, the country with the stockpile would still have a stable currency to buy supplies like food with in emergency. China has to buy US dollars into its stockpile, in order to keep its own currency artificially low - but, when the Chinese currency is eventually set loose, it would gain value - rendering the currency they have stockpiled less valuable - effectively destroying wealth.

Correction. The Chinese Yuan is pegged to the dollar ( 6 yuan = $1). The Chinese dont have to buy dollars to keep their currency low wrt the dollar. And, When the chinese currency is allowed to trade freely in the world market , its not as if 40% of the their dollar exchange reserves will go waste. The dollar will still buy things that it was originally capable of . Eg - The chinese will still be able to pay for their oil imports . However , if the yuan is allowed to trade freely with the dollar , it would appreciate quite a bit against the dollar, making chinese imports into the U.S costlier..

[Ram]

'The World is Flat' by Thomas Friedman is a good book to start on if you dont know anything.

Yes, Friedman's book is a good one to begin with. For those who are hardcore into economics, his book will be a bit of a dis-appointment though. He tends to focus more on rhetoric and fancy facts rather than hardcore numbers. But , excellent book nevertheless. Friedman brilliantly capitalized the paranoia in the U.S about outsourcing and got the timing of the book just about perfect.

[THX_1138]

This is what i have been crying hoarse about for the past few months since i first posted on this site. The control of the yuan coupled with their unchecked and unregulated growth would spell disaster if the global consumer market suddenly began to diminish. and yes i agree with the whole bit on the purchasing of foreign currency futures to dissolve their national surplus which would otherwise force their currency to gain strength. unless the chinese move to a market regulated currency or better yet, regulate some of their growth and deregulate foreign investment restrictions, their economy is literally running away. moreover, there is a considerable opinion that if this economic growth was to decrease, the desires for a democratic government would arise again.

[gorah_pindu]

Yes' date=' Friedman's book is a good one to begin with. For those who are hardcore into economics, his book will be a bit of a dis-appointment though. He tends to focus more on rhetoric and fancy facts rather than hardcore numbers. But , excellent book nevertheless. Friedman brilliantly capitalized the paranoia in the U.S about outsourcing and got the timing of the book just about perfect.[/quote'] You are probably a lot more familiar with economics than I am - since I was never interested as a kid (ex commie), and didnt take any courses in economics or business - id be interested to hear your opinion on The Writing on the Wall (or just the review, if you havent read it).

[gorah_pindu]

This is what i have been crying hoarse about for the past few months since i first posted on this site. The control of the yuan coupled with their unchecked and unregulated growth would spell disaster if the global consumer market suddenly began to diminish. and yes i agree with the whole bit on the purchasing of foreign currency futures to dissolve their national surplus which would otherwise force their currency to gain strength. unless the chinese move to a market regulated currency or better yet, regulate some of their growth and deregulate foreign investment restrictions, their economy is literally running away. moreover, there is a considerable opinion that if this economic growth was to decrease, the desires for a democratic government would arise again.

Yeah - you ought to read some of the statistics in this book - its unbelievable how wastefull their system is.

[Ram]

unless the chinese move to a market regulated currency or better yet, regulate some of their growth and deregulate foreign investment restrictions, their economy is literally running away. moreover, there is a considerable opinion that if this economic growth was to decrease, the desires for a democratic government would arise again.

That is exactly what the chinese are doing, trying for a "soft landing" as it is so popularly referred to in journalistic parlance. They are trying to slow economic growth to more managable levels , by increasing interest rates , hiking cost of borrowing and trying to have as little excess capacity as possible. They will definately not de-regulate the Yuan any time soon, though as a comprimise to adhere to WTO rules , it is told they might allow it to trade within certain boundaries..

[gorah_pindu]

I dunno about soft landing - their party is even more reluctant to reform where it is needed than the CPI.