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U.S. Will Double Dip If China Hits the Economic Brakes

By Sean Hyman   |   Monday, 25 Jan 2010 01:23 PM

For the last several years, the world has watched in awe as China’s growth has continued to climb.

However, lately, China’s economy has been on the verge of overheating.

The government has taken recent steps to curb this excessive growth by increasing the reserve requirements for China’s banks.

In other words, since China requires that banks hold onto more money to meet requirements, the banks have less money they can lend to businesses.

China has increased these requirements a couple of times recently within a short span of time.

Yet, it doesn’t seem to be good enough.

China will likely have to do more.

So what’s next on the agenda?

While only the Chinese government knows for sure, the most likely tools that China will have at their disposal are to increase interest rates and to allow the Chinese currency to appreciate quite substantially within a relatively short amount of time.

In the past, China has been known to make “instant revaluations” overnight without any prior warning.

It wouldn’t surprise me if this were to happen again.

So, with reserve requirements being increased and interest rates and currency exchange rates being raised, it will likely do the job in toning down some of the excessive growth in the Chinese economy.

Now, here’s the problem.

As China works to correct a problem in its economy, it will have a ripple effect around the world.

Formerly, it was China’s growth and demand for the world’s commodities that aided the global economy in coming out of its recession quicker.

However, with the global economy being in such a fragile state right now, a slowdown in China would be unwelcome news for the rest of the world.

As their expansion slows down, they won’t have quite as big of a thirst for the world’s commodities as they have in the past, at least for now.

This will weigh on commodity exporting countries like Australia, South Africa, New Zealand and Canada.

Australia could really feel the heat from the slow down since China has its hands right in the middle of Australia’s mining industry.

Also, a slowdown in China could help to tip the U.S. back into another recession (making a “double dip” recession).

So, while China needs to slow down its excessive growth for its own good, it won’t bode well for the remainder of the world as they are the losers in the “Chinese economic slowdown” game.

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For the last several years, the world has watched in awe as China s growth has continued to climb. However, lately, China s economy has been on the verge of overheating. The government has taken recent steps to curb this excessive growth by increasing the reserve...
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