China struggles to curb inflation that threatens global growth

chinese economy

China's central bank raised interest rates and the deposit reserve ratio in an effort to cool the nation's overheating economy. Image: Flickr/Dmantu CC-BY-SA

For the fourth time this year, China’s central bank announced Sunday that the biggest Chinese banks must hold greater cash reserves. The move is an attempt to curb Chinese inflation that is emerging as a serious threat to a global economy reliant on cheap Chinese exports. Meanwhile, Donald Trump, pandering for a presidential bid, proposed a 25 percent tariff on Chinese imports that was roundly ridiculed by economists.

China holds a tiger by the tail

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 money available 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. China’s rapidly expanding economy has triggered inflation that the communist government fears will spawn a wave of social instability. Food and gas prices in China are soaring, and the price of a home has become far out of reach for the average annual income of Chinese citizens. To control food prices, Beijing has increased agricultural subsidies and is forbidding Chinese companies from raising consumer prices. The government has also raised wages, which has contributed to China’s mounting inflation problem.

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 such as roads and railways. Some predict that despite the government’s attempts to douse the flames, China faces a rate of inflation approaching 5 percent for the next decade. Such high inflation threatens China’s position as the dominant global source of manufactured goods. As Chinese wages and production costs rise, companies are asking higher prices for goods shipped overseas. Big Chinese customers such as the U.S. and Europe, faced with rising prices, will likely seek cheaper goods from other emerging economies. Should the Chinese economy contract, U.S. multinational companies such as General Electric and General Motors, which have tied most of their growth to the Chinese market, could suffer serious setbacks.

Trump’s tariff: a trade war nobody wins

China’s failures to cool its overheating economy are adding to pressure on Beijing from foreign governments to allow the yuan to rise in value and reduce its huge trade surplus. Donald Trump, posturing for a possible GOP presidential bid, is pushing a 25 percent tariff on Chinese imports. But experts say tariffs are a flawed response to China’s currency manipulation. Trump’s tariff would probably set off a trade war between the U.S. and China that would damage the global economy. A 25 percent tariff would make Chinese goods American consumers depend on more expensive, feeding U.S. inflation. China, which has become the No. 3 market for U.S. exports, could retaliate by closing that market to U.S. companies. Most analysts agree that a tariff would not to survive a Chinese appeal to the World Trade Organization, anyway.

Sources

New York Times

Associated Press

CNNMoney.com

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