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This article describes China's reaction to US Fiscal policy as it looks in disbelieve at the political dysfunction in Washington. They no longer trust the US to protect the value of the dollar. Consequently, they will slow down purchases of US assets. This means that they will also shift their economic strategy from reliance on exports. They believe that this is necessary not only because of the risk to the dollar but also because they see economic growth slowing down in the US, Europe and Japan.
In order to develop a more consumer driven economy, China will develop the service sector of its economy and it will invest in urban development and a stronger social welfare system.
The US will face serious problems selling treasuries to fund its debt as China backs away from its export focused strategy which required the purchase of treasuries to maintain the peg of its currency with the dollar. It will have to increase domestic savings and face the risk of higher interest rates.
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