Gdp_Growth_in_China

China's GDP grows 9.6% in Q3, the worldwide economics is recovering. Xinhua China daily 09/14/10 In this article, the data sited from the second quarter report of China’s GDP is used as an evidence of global economic recovery. Review: Some major economies reported positive growth for the first quarter. In the United States, for example, GDP grew 3.2 percent in the first quarter and 1.6 in the second quarter (1). The International Monetary Fund has posted that the global GDP growth is approaching 4 percent. A lot of positive statistics raise show people a good view that the worldwide economics is recovering. In my opinion, the current recovery is based on government stimulus. United States and England are operating fiscal budget deficits over 10 percent of their GDP. Interest rates around the world are close to zero. Considering the amount of stimulus spending, the recovery is not strong enough. Secondly, overstimulation will eventually lead to inflation; as the result, interest rates will rise again and cause another dip of the global economy. Furthermore, a lot of crucial problems exposed by the crisis are still not resolved. Therefore, the recovery is not sustainable. The economy is guided by the price system, no matter it is worldwide or a small local market. For instance, the auto industry in China is booming as everyone says. At the same time, automakers are depressed everywhere else around the world. What makes the difference between these two facts' It's true that auto industry is booming in China. This is line with the global industry's trend. In case a country's per capita income rises above US$ 6,000, the auto demand tends to shift downwards. In fact, the growth is not stable. The auto market in China is new. That means most of the consumers are buying their first car, which will creating a spike in demand. As a substitute, demand for replacement of vehicles will make another the spike in its own demand. On the other hand, for the suppliers, which include auto dealers and manufacturers, the auto industry in China seems highly profitable. One can be easily enticed to think this profitability is due to strong demand. Autos are globally traded. Therefore, when we are considering the demand and supply relationship, the worldwide factors must be taken into count. The auto producers inside China and distributors are profitable as the result of trading barriers that shut global competition out. The obvious sign is that the auto price is significantly higher in China than elsewhere. From an investment perspective, one should be cautious about China's auto sector. Most analysts say that the auto stocks should be popular because of strong demand growth and high profitability. In fact this profitability is due to trade barriers. The average taxes for importing autos are above 137%. This forms a monopolistic competition market. Hence, one must consider the sustainability of the barriers. In case the tax rate is decreased, Chinese automaker profits will shift downwards till reaching the levels of counterparts elsewhere. Furthermore, demand growth will surely slow due to market saturation. There are certain number of people in China need and could afford cars. We can reach the conclusion that the profitability of China's auto industry is highly vulnerable. The rapidly increasing in auto industry cannot be considered as the sign of economical recovering. Another story against the recovering theory is about the U.S economy. The U.S. economy has been rising based on consumption, which means its growth is more dependent on a declining savings rate against income growth. This is exactly what happened before the burst of the real estate bubble. The U.S. property market is still in the doldrums, and there are no asset gains ahead to support the declining savings rate. Furthermore, the nation's income growth is quite small compared to the increased deficit. The main trouble of U.S. economy is painfully evident in home foreclosure data. The foreclosure rate this year has exceeded the historical highpoint 2.8 million, or 2.2 percent of all households, reached last year (2). Housing prices have fallen 30 percent, but they are still high relative to wages and GDP. If historical patterns hold, U.S. housing prices could have decreased more. This has not happened so far because the Federal Reserve has kept interest rates about zero and has held down mortgage rates by buying one-tenth of the country's mortgages. What the goverment could do is to increase inflation in order to drag wages higher so that they could more closely match property prices. If the Federal allows a rise in inflation, people may be panic and that will lead to another financial crisis. Before the conclusion, let us move on to the theory of real estate industry in China, the trend is similar to the past. The major detour from the past course is that the infrastructure of China's property market is larger than the nation's investment composition. Most governments have been counting on stimulus to resuscitate their economies. As a matter of fact, an economy tends to have a major misalignment of supply and demand after a big bubble phase. It will take a long time to make appropriate adjustment. Therefore, the recent growth in GDP cannot be use as the evidence of global economic recovering. References: (1) NEW YORK (CNNMoney.com) Chris Isidore, August 27, 2010 (2) “The Economics” Detroit. September 23th.2010