DIFFERENCE OF TWO ECONOMIES

CHINA <> AMERICA

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OUTLINEI. IntroductionII. China

-Government Policy-Investment in China

III. United States-House Bubble

- Collapse of house bubble and effects on economy -Deflation

IV. Difference between China and United StatesV. Conclusion

CHINA

China Government Policy

Past 1978-end of the’90s• Socialism• Private Company• Turn away from

Interventionist industrial Policy

Present end of the’90s-2010 • Socialism• State-Owned Company • Interventionist industrial

Policy

Mao Zedong (Chairman of the People's Republic of China 1954-1959): Communism

Investment in China

Advantages• Wealthy• Cheap material, labor cost• Population: 1.3 billion

Disadvantages• Poverty• Conservative thinking• Connection factor• Tricky

UNITED STATES

Investment booms in America in 1990s

The Internet explosion: The period of tremendous growth of the Internet in the latter half of the 1990s. In the 1994-1996 time frame, it changed from a scientific and governmental research network to a commercial and consumer marketplace.

Real estate: The real estate market changed its direction markedly around 1990, from a booming market to a market in the doldrums for the better part of a decade, and then the market started accelerating upwards at increasing rates.

The national home price boom since the late 1990s appears unprecedented in US history, although the “baby boom” in housing of the late 1940s and early 1950s comes close, and there have been some very large local boom

United States Housing Bubble

The Collapse of Housing Bubble

Causes: - The crash of subprime lending market (subprime

mortgages): When the interest rates started to raise, people stopped buying house.

- The financial mania ran its course, buyers become scarer. The buyer pool was seriously depleted leaving prices artifically high levels. When the abundance of sellers became greater than the number of available buyers qualifying for financing, prices began to fall.

Results: - Banks were awash in debts- A large amount of companies faced forclosure. Even

the companies that did not foreclose suffered losses that amounted to billions of dollars.,

- People cut spending, shrinked sales for businesses and prompted layoffs.

Effects on Economy

The result of the collapse of

American housing price:

+ Homeowner: shrinking sales for

businesses and prompting layoff.

+ Vital signs weaken: plunging home sales, a bleak job market, the quarterly rate of economic growth had slowed – to 1.6%

fears of a second recession are growing despite an aggressive regimen of treatments

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Effects on Economy• The government policy makers cannot deliver

meaningful intervention , because any proposed curative can risk adding to national debt:

the dramatic expansion of the debt make the people fear that the creditors (like China and Japan) might demand sharply higher interest rate to finance American spending

The rate inflicts inflation or rising prices

Reasons:1. The rate : Merchants loose

faith in the sanctity of dollar and demand more dollars in exchange for oil, electronics and other items

2. Investors: loose faith in real estate and stocks flooding into government saving bonds interest rate low

JAPANJapan’s years of pain were made worse by deflation:Deflation a sustained, broad drop discourages business from investing and hiring Less work and lower wage less spending power reinforce a predilection against hiring and investing

===> a downward spiral

Germany

• Has long harbored particularly powerful fears of inflation

• Germany has done well in the current downturn without large stimulus spending

• Germans had 2 advantages over Americans:+ a more extensive social safety net to give

consumers more money+ a vibrant manufacturing base to churn out

more goods for export

From above situation =>>>>The growing impression of weakening economy combined with a dearth of policy options has made one country fall in to trouble

American now: trouble began when a speculative real estate frenzy ended, leaving banks awash in debts. The crisis was deepened by indecisive policy

+ the trajectory of prices is leading to fears of deflation

American’s solutions to attack deflation:

• The primary way: inject credit into the economy, giving reluctant consumers the ability to spend

• The Fed adjust a benchmark overnight rate for banks, has kept its target rate near zero

• The Fed also relieved American banks of trouble investments, many linked to mortgages, to give the banks room to make new loans

Result• 1. The good result:The Fed has been confronting the possibility of

another depression.• 2. The bad one:+The Fed added to the nation’s debts+ following the economists: that’s the wrong

medicine for the American economy – take the medicine and stave off the lethal threat, the deal with the collateral problems

DIFFERENCES

CHINA

AMERICA

An ailing economy.

Inflation or Deflation.

National debt.

Uncertainty reigns on Wall street.

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o An ailing economy.o Inflation or Deflation.o State firmso Lack of control by

government

China’s change

• China’s state-run companies runs again (pump the public money

into companies that it expects to upgrade the industrial base and

employ more people).

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China’s change

Enhance government control

over some parts of the

economy.

Become the world’s second-

largest economy this year

(their own more statist

approach to economy

management, the socialist

system’s advantages).

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China’s change

Enhance government control over some parts of the economy.

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Less attuned to the interest of

foreign investors and China’s own

private sector the earlier generation

(economy reforms).

China’s change

Major industrial policy(dismantled great

sections which are being partly undone

in the first 20 years from 1978 to 90s).

China’s change

4 trillion renminbi ($588) stimulus

package (china pumped out for new

highways, railroads and other big

projects went to state-owned

companies.)

Huge expansion of the government role

in the corporate sector in 2009 (set up

8000 state-owned investment

companies,EX: chinese auto maker).

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China’s achievement

State control of energy supplies is crucial to

china’s growth (taking over coal price, fuel).

State companies keep government contract

for roads and bridges, finance and even

military.

Top-down strategy (state control of vast ereas

of the economy will generate china’s growth.)25