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A Far-East Fiasco?


China must stimulate economy or risk political unrest.


I often start my morning readings by eating an egg, cheese and turkey sandwich at Panera Bread. This morning was no different. I was reading newspapers on my Kindle and sipping hazelnut coffee (I know, I just lost the respect of true coffee drinkers, but I like hazelnut). I began with yesterday's Financial Times. There was an article on China. I believe watching what's going on in China is important, as China has a significant impact on the US, so I started reading:

"The benchmark one-year lending rate was cut by 27 basis points to 5.31 per cent, while the one-year deposit rate was lowered by the same amount to 2.25 per cent."

That's not surprising news, plus it shows some originality - China doesn't want to end up like the US. So it cut interest rates in a multiple of 27 basis points, not in boring multiples of 25 basis points.

"The government estimates more than 10m migrant workers have lost their jobs so far, while 6.5m university students will enter the workforce next year."

China is unlikely to escape the fate of developing countries, and facing higher unemployment, a question is raised: Will this lead to political unrest? High unemployment in China is very different than high unemployment in the US or Europe. Unlike in the developed world, there isn't much of a social net in China.

If you lose your job in Kansas, you may be forced to shop at Wal-Mart (WMT) instead of Target (TGT) and downgrade to basic cable (only 50 channels, sorry). Of course I'm oversimplifying, but the point is in the US we have unemployment benefits and many other government programs aimed at keeping us from starving. This isn't the case in China.

As China's social net is in its infancy, high unemployment in many cases may mean hunger and, ultimately, political unrest. The Chinese government knows this well. Unless it comes up with social net very quickly, it will need to stimulate the hell out of its economy - far beyond the stimulus announced to date. This means more government spending. But the next bit of news I read revealed that doing so would be difficult:

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