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

Property rates in Mumbai, India

I really wonder why the property rates are still going up. Looks like the buying capacity of the Mumbaiites is still going great. The rates here are comparable to the best locations in the world. Mumbai, the financial capital of India has always been the trendsetter in the indicative property prices of real estate India Mumbai as such has always been in the forefront when it comes to property prices. It has in the recent years a record rise in property prices at par with some of the highest real estate prices in the world. In such terms, Mumbai, our ‘Manhattan of India’ can put New York’s Manhattan to shame.

The property prices as well as the increase in rental values in Mumbai owe much of its credit to the large scale investments in the commercial sector. Mumbai has always been the hot favorite for most of the corporate sector to have their headquarters in the city. And with increasing investments by MNCs in the IT, ITES and the BPO sector, there has been a growing demand for office space; which have consequently created an imbalance in demand and supply for residential properties. The rental values in Mumbai have also gone high corresponding to that in other metros.




Mumbai is also the fashion capital of India, so it is one of the foremost cities to be hit by the retail buzz. With the opening up of the retail market, there has been a growing demand for retail properties in Mumbai. This has created a viable market for mall space and other retail stores and showrooms. These retail stores and malls are either owned by a business group or leased for hefty prices as the demand is high.

To compare, I checked the rates for New York, USA and here is what I found ... (see picture on right)
For you to understand what a single family home is, you can see here : http://en.wikipedia.org/wiki/Single-family_detached_home. For Condominiums see here : http://en.wikipedia.org/wiki/Condominium

Warren buffet's Principle in current US economy

I came across something that caught my attention a few days back. It's about the economy and the current economic situation.

It describes the economic situation and how economy progresses and depresses in the following picture.

I hear that the following speech is by Warren Buffet but don't know if that's true. It's called Warren Buffet's Principle. He says ...

"We begin this New Year with dampened enthusiasm and dented optimism. Our happiness is diluted and our peace is threatened by the financial illness that has infected our families, organizations and nations.

Everyone is desperate to find a remedy that will cure their financial illness and help them recover their financial health. They expect the financial experts to provide them with remedies, forgetting the fact that it is these experts who created this financial mess.

Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older.

This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.

Hard work : All hard work brings profit; but mere talk leads only to poverty.

Laziness : A sleeping lobster is carried away by the water current.

Earnings : Never depend on a single source of income.

Spending : If you buy things you don't need, you'll soon sell things you need.

Savings : Don't save what is left after spending; Spend what is left after saving.

Accounting : It's no use carrying an umbrella, if your shoes are leaking.

Auditing : Beware of little expenses; a small leak can sink a large ship.

Risk-taking : Never test the depth of the river with both feet.

Investment : Don't put all your eggs in one basket.

I'm certain that those who have already been practicing these principles remain financially healthy. I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.

Let us become wiser and lead a happy, healthy, prosperous and peaceful life."

-- Warren Buffet

Well going by the picture,

We are at 5 right now......GOOD TIMES RETURN AT 6, SO CHEER UP!