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Dangers of an Overheated China

There's a shout-out to Hayek -- and a warning about America's debt reliance on China -- in this recent NYT article.

By TYLER COWEN
Published: November 28, 2009

PRESIDENT OBAMA’S recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector. Yet this arrangement may unravel in a dangerous way, and if it does, the most likely culprit will be Chinese economic overcapacity.

Several hundred million Chinese peasants have moved from the countryside to the cities over the last 30 years, in one of the largest, most rapid migrations in history.

To help make this work, the Chinese government has subsidized its exporters by pegging the renminbi at an unnaturally low rate to the dollar. This has supported relatively high-paying export jobs; additional subsidies have included direct credit allocation and preferential treatment for coastal enterprises.

These aren’t the recommended policies you would find in a basic economics text, but it’s hard to argue with success. Most important, it has given many more Chinese a stake in the future of their society.

Those same subsidies, however, have spurred excess capacity and created a dangerous political dynamic in which these investments have to be propped up at all cost.

Continue at: The New York Times



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somethings about china that should be considered.

The Chinese are a right smart more practical minded than most americans.

China has excellent health care at prices that Americans could not imagine. Americans seem to think that getting ripped off by paying a thousand or two for $20 work of medical work translates to quality.

The RMB has been grossly undervalued for quite awhile. Even 10 years ago the RMB yuan was worth 2 to 3 times what the standard exchange rate was.