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29 May, 2012

Much-Needed Cooling Awaits China As West Slows Growth

By Clem Chamber (Global Times)

Beijing, May 25, 2012 – Developing countries are now drastically out-competing the developed world. Capital is flowing away from “rich” countries to emerging ones via the huge trade deficits of developed nations. The US, with its ever-widening gap reaching $51.8 billion this March, serves as the prime example.

Trade surpluses of the developing world, meanwhile, are giving emerging nations – China included – the capital with which to expand at incredible rates.

It is a continuing process via which economies of the West are being dramatically weakened. Unable to compete with cheap imports, Western governments have been forced to embark on massive borrowing programs to maintain the lifestyles to which their citizens have become accustomed.

The impact of this borrowing has driven Western economies to become reliant on debt and leverage, a cycle which has become unsupportable.

Many developed countries are on the edge of bankruptcy in Europe, just as many of the countries in the developing world are flush with cash. Because of the competition gap, developing nations have sensible fiscal budgets and large trade surpluses, while many developed countries have runaway fiscal and trade deficits.

A depressed developed world amounts to less prosperous “clients” for China, which will certainly cramp its growth.

However, this may not be so terrible, as too much growth can be as dangerous as too little.

The People’s Bank of China announced last week it would lower the country’s reserve requirement ratio (RRR) by 50 basis points. Effective from May 18, it is the second such move this year and will allow Chinese banks to lend more cash. The RRR cut came after key economic data in April, such as industrial output and fixed asset investment suggested the economy faces further downward pressures.

China’s fiddling with the RRR is an attempt to cool the economy enough to avoid a runaway, speculative bubble and instead produce a soft landing.

Now, with Europe likely to enter an extended period of recession or stagflation, the euro crisis may produce a cooling effect without a credit squeeze. As such, there is a lot of room for looser monetary policy ahead.

European austerity, either by contraction or default, will drag on the world economy, including developing nations. As such, fears of economic overheating in both China and other BRIC countries will be greatly reduced.

However, as developing countries lose their primacy in trade, the risks to global trade will rise. Trade imbalances must be less acute or developed creditor countries will simply go broke and cease to be good customers.

The “golden geese” of the West need to be allowed to even the score of trade – whether that is through the deregulation of developing countries’ trade laws or by their acceptance of higher valuations of their currencies.

The developed world simply can’t continue much longer trading at trillion dollar yearly imbalances. One way or another, laws of economics will bring that to an end.