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July 10, 2010

Can China overtake Japan's economy?

Chinese economy may be tapering off. There are reports about dwindling growth and growing inflation.
Even after the Lehman Brothers' crisis China has fared well in its economy by boosting its domestic demand (via official expenditure, bank lendings and last but not least by inflating its statistics), but it may be hitting the limits.

As in the case of England during the Industrial Revolution and Japan after the Pacific War, China realized its rapid growth by massive export. The income from the export was invested in real estates and construction of infrastructure, bringing its economy into a boom.
But China's export has been low for recent two years and it is about time for the official expenditure and bank lendings to get out of breath (because of inflation fear).

China has replaced Japan as the "World's Workshop". It would mean that when China becomes equal in economic size with Japan, its growth is destined to taper off, because after that point the Chinese export to the U.S. and the EU is not able to grow fast.

If China's economy stumbles, then the real estate prices will collapse and banks will be flooded with non-performing assets (though in a socialist economy it is the usual way to simply ignore and shelve debts).

Such a scenario will entail fall of Yuan's value, making their export eveb easier, but ensuing inflation will negate its effect by pushing up the production cost.

It may be time now to quietly prepare for rescue measures of the Chinese economy.

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