The U.S. -China trade talks has started on Monday in Beijing to resolve their economic disputes rather that going all out tit for tat trade tariff on each other. This talks will likely end with both parties coming to an agreement or deal as both the economies in this equation are not looking good in the near future. The U.S. with its Q.E driven economy, debt and dollar uncertainty. China on the other hand has its own major problems back home which could escalate if the trade war is not put to an end.
Labor
China boost its economy in the past decades using its huge workforce. China’s population strength has played a great role on its economy. That been said most of the work force is unskilled. There is no flexibility in the labor market due to the shortage of skilled labors. And as the economy prospers people demand more wages. So cost of the production rises for manufacturing and due to shortage of skilled labors market can’t grow to its full potential.
Debt
China using its debt trap diplomacy comes with their experience of own debt problem. The state owned enterprise accounts for 20% of employment and also 250% debt to GDP. There has been a lot of mal investment from the government and they have to keep funding it as a decrease in funding will result in job cuts which the Chinese can’t effort right now. The debt to GDP has been increasing from 2008 at a all time high.
Interest rates
Chinese have been pumping money in the economy to keep its economic growth steady. Firms borrowed a lot of it to keep up with its investments and not all investment goes as it is planned. Now companies has to borrow to pay its interest to keep it from going bankrupt. This had led to massive debt accumulation mess which state has to clean up.
Mushroom society
Nearly everyone is familiar with China’s one child policy (now lifted).Back in 1970’s population grew rapidly that the GDP so to prevent it the government came up with one child policy. Now there has been a lot of advantage due to this policy in the short run but in the long run number of non working people(retiree) will be huge like the top of the mushroom supported by rather low number of work force. You get the idea it will put a lot of pressure on the working class.
Real estate bubble
As there is a huge amount of money floating in the economy people tent to buy cars, real estate. As more people buy houses there is a supply shortage which indirectly increase or inflates real estate prices. This is exactly what is going on there. Prices of real estate has gone so far that many economist are calling it a ‘real estate bubble’ and as the real estate accounts for 30% of its GDP any minor crash will bring the whole economy down on its knees.
The Wannabe Economist 