During our trip and studies in China we discussed many aspects of their fiscal policy that were different from America's. In this paper I will discuss four specific areas I see that could be improved, and will make strategy suggestions on how to improve. The areas under discussion will be financial markets, trade surplus, foreign exchange policy, GDP/inflation risk, energy consumption and the Asian financial crisis.
Macroeconomic policies are developed and enforced by the National Development and Reform Commission and the Chinese Central Bank. In the Q1 Quarterly Update released by the World Bank May 30, the main points revolved around policy on liquidity and rebalancing the economy. The overall economy does not appear to be overheated as demand and supply are growing in lock step.
Chinese Markets
Even though the economy is not currently over-heating, Beijing is concerned about this phenomenon due to an increase in market investment, specifically, in the Shanghai Index which has reached and closed north of 4000 this year multiple times (all time high), and is up some 225% in 2007. Asset valuations (soaring P/E ratios) continue to be a concern which only strengthens the case for tighter monetary policy, and higher interest rates to tie up consumer's money in bank deposits, as opposed to speculating in the market for higher returns. However, profits continue to grow at a 40% annual clip, setting new records month after month which are used by some analysts to sustain index growth. A big cause of the drive of money into the stock market is due to the returns on bank deposits failing to reach the CPI inflation level (approx. 2%). This is a chief cause for concern because it is more fiscally responsible for the Chinese to spend all their income immed ...