Wednesday, July 09, 2008

What's going on in China

Stratfor mentioned the crucial aspect of Chinese industrial success, massive subsidy of energy prices. It is not just wage differentials keeping consumer products cheap, it is all the money that the central government is paying not to have a fuel cost shock like the American economy is enduring.

If individual Chinese people and companies had to pay market prices for gasoline and fuel oil, industries would shut down, people would park their cars and the country's economy would collapse. On the other hand, if China continues paying these subsidies, there will not be any money left to loan to companies to modernize to keep up with consumer demand. This too will doom their economy as countries and factories with cheap labor, access to Western capital markets and oil of their own (Mexico) are able to once again be competitive with the Chinese.