Monday, July 27, 2015

The “Invisible Hand” Slaps China

China is growing at a rapid pace but that growth comes with a few growing pains. The Shanghai Composite has been hit an 8.5% loss and this has caused economists to scratch their heads and wonder why.  The government stimulus package doesn’t appear to be working and this should lead American policy makers to consider their own approaches.
China has some things that have led to its economic increase but it has more things starting to work against it. Cheap labor and growing infrastructure were helped the country spring forward in its growth. They were growing so fast that they even hoped their own currency would become an international standard.
Unfortunately, the tide has turned in many cases. Manufacturing in many countries has reached parity with Chinese manufacturing based in capital investments and technological improvements. It is possible to produce products of same or higher quality in other countries.
There are also trade wars and tariffs that artificially protect Chinese businesses from competition. The tight government control that lack adequate intellectual property right protections and barriers to entry are causing difficulties in gather new innovations, technologies, and intellectual.
The artificial propping of the economy means that the stock market increased in the short-term to take advantage of the massive government influx. This influx has run its course and appears to be poised for major market corrections that put stocks back to their natural value.
China will have a difficult next few years cleaning out their economy and making a solid decision to enter the free market or maintain the heavy controls of the past. Each course will have its own consequences. For now the nation has decided to jump in and manage the market correction.
Despite their best efforts China’s success is based in its ability to engage the world market and engage in meaningful reform that leads to greater prosperity for its people. This cannot be bought with government funds and becomes increasingly difficult as the fundamentals of the economy shift. Greater openness and individual pursuit of wealth can turn the slap of the invisible hand to a helping one.

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