How China Started Economic Downturn

Now, that the world is certain that we are headed for a great recession (and may be another great depression), and the focus is high on who did it ..what caused it ...and remedial actions ... to counteract the recession, it becomes necessary to understand why it has started. I listen to a number of economists on TV or YouTube saying that the economy is spiraling downwards because of wrong policies ...unfair business means etc. To the common man, all of this just translates to more struggle in life. You might run a risk of losing your job sooner or later. One might have difficulty supporting one's family given that the inflation is bound to go up. Since the time it started and Citibank came into headlines for wrong kinds of lending and credit practices, there were other reports that China may cause a fierce problem globally because of its export/import regulations and unfairly manipulating its currency. There were huge amounts of treasury bonds being written off to China. Simply put it meant US people were consuming much more than their capacity and this consumption was being provided by borrowing from China. Allow me to explain what role China has in causing the little problem that all of us face today ...

China and the United States have been developing a highly symbiotic, and dangerous, relationship. China has since discovered that if it builds its economy on cheap exports, it would allow China to grow much faster than it ever had. It would also allow to create enough jobs to mollify its population. American consumers snapped up these cheap exports — shoes, toys, electronics and the like (and they are still doing it ... just enter a Walmart supercentre anywhere in US and you will realise how)— and China soon found itself owning a huge pile of American dollars. This started happening around a decade ago. Governments don’t like to hold too much cash, simply because it does not pays any return. So the Chinese bought many, many Treasury bonds with their accumulated US dollars. This additional demand for Treasuries was one big reason (there, of course, are many other reasons too) that interest rates fell so low in recent years. Thanks to those low interest rates, Americans were able to go on a shopping spree (they are infamous for it by now) and buy those things, like houses, they couldn’t really afford earlier. China kept lending and exporting, and US simply kept borrowing and consuming. It all worked very nicely, until it became clear what's going to happen to the US and Chinese economy.
Today Chinese decided that they no longer wanted to buy Treasury bonds. The U.S. government’s recent spending for bank bailouts and stimulus may have been necessary to get the economy slowly moving again, but it also raised the specter of eventual inflation, which would definitely damage the value of Treasuries. If the Chinese get unnerved by this, they can instead use their cash to buy the bonds of other countries, which would cause interest rates in US to jump, prolonging the recession. Chinese premiere has said it umpteen number of times that they have lent a huge amount of money to the US and that they were concerned about the safety of their assets. Were China to cut back sharply on its purchase of Treasury bonds, it would send the value of the bonds down, hurting the Chinese, who already own hundreds of billions of dollars’ worth.
Chinese cheap money thus caused the over consumption by the US consumers. In China, the collapse of global trade has eliminated approx. 20 million jobs according to Beijing’s official numbers. If the global economy has to be brought back to a sustainable path, it requires dealing with the imbalances between China and the United States. In the broadest terms, this will mean that Americans must consume less and that Chinese must consume more. But here is the problem. Moving to an economy based more on consumption and less on exports happens to be the policy of the Chinese government. The biggest problem in China’s economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable. However, the Chinese economy has become even less reliant on household spending, and even more reliant on business and government spending, in recent years.
Another interesting thing about China has been its currency value. Foreign-exchange rates are pretty complex, but the debate over the renminbi is really just a part of the broader issue of the economic imbalances between China and the United States. When a country exports more than it imports, as China has been doing, the value of its currency tends to rise. Exports then become more expensive (and thus decline), while imports become relatively cheap (and so increase). It’s a self-correcting system that, ideally, prevents big trade gaps between countries. But China has frequently intervened in the foreign-exchange markets to hold down the value of the renminbi and keep its exports booming. It has become less aggressive about doing so over the past few years, responding to international pressure, and the renminbi has risen more than 20 percent relative to the dollar. Still, many economists think that it still appears to be undervalued by about 10 to 20 percent. The Chinese tend to take umbrage at this analysis, because it suggests their boom has come at the expense of others.
When economists describe the relationship between China and the United States, it often sounds circular. US saves too little and China saves too much. China exports too much and US consumes too much. The situation can seem to be a reflection of Chinese and American cultures. Americans became hooked on cheap goods and cheap money, and China came to depend on the income from selling those goods. Chinese leaders didn’t set out with a grand plan to create an enormous trade gap but each step along the way seemed to make sense. The authoritarian government could stifle dissent with jobs. Local party leaders were rewarded for presiding over economic growth, and exports were the easiest way to achieve it. Once the export sector was built up, the cost of allowing the renminbi to appreciate was enormous.
The economic boom brought big profits, and companies held on to much of them. The government also increased its savings in last decade by collecting more taxes and, until the financial crisis, ran a budget surplus. And households increased their own savings in the 1990s, in reaction to the dismantling of many bloated state-run companies and the cradle-to-grave benefits. Much like India, when a Chinese citizen is rushed to the hospital after a road accident today, the first stop for the victim’s family is often the bank or whatever he has in his home locker. Many hospitals don’t admit patients until they have paid, and many families have no health insurance. Instead, they insure themselves, by saving.
The imbalances can seem to be overwhelmingly China’s fault. But that’s not truly the case. Just as policy makers in Beijing encouraged the rise in savings and exports, American policy makers took steps that encouraged over consumption. They allowed incomes for most families to stagnate, which made savings a luxury that many couldn’t afford and debt a way to finance rising living standards. US pretended — even argued — that there was no housing bubble.
Even more to the point, China, like the United States, is now paying a price for the two countries’ co-dependent relationship. The cities that experienced tremendous booms over the past decade are struggling with mass unemployment. Millions of recent college graduates, the demographic that often starts protest movements, are unemployed across China. Stocks have fallen more sharply than they have in US. These are the consequences of the unsustainable growth everyone worried about.
Other References:
http://www.bloggingstocks.com/2009/01/21/chinas-economic-downturn-finally-start-to-hurt-other-countries/ and

http://www2.canada.com/vancouversun/news/business/story.html?id=cbadf922-3367-4f02-935f-9a95270e2557