|Chinese Construction Curbed|
|Topic||Supply and Demand/Equilibrium|
|Key Words||Deflation, Prices, Employment, Welfare Benefits, Goods, Minimum Prices, Interest Rates, Imports, Demand, Exports|
The Chinese economy is experiencing deflation, that is constantly falling prices. The cause is deteriorating consumer confidence: people believe that the economy will weaken, leading to reductions in employment and lower welfare benefits including pensions.
The Chinese authorities have decided to ban the construction of new factories that would produce consumer goods, such as refrigerators and air-conditioners, as well as those that would make goods such as candy and liquor. The construction of new stores, offices, luxury hotels, and apartment buildings is also being banned. The intention is to halt the fall in prices. It is unclear whether the directive will be respected.
Previous strategies have not been very successful. Industry regulators have tried to enforce minimum prices. The financial authorities have reduced interest rates, hoping that consumers would spend more.
A further alternative might be to devalue the Chinese currency, the yuan. By increasing the price of imports, domestic and foreign demand for Chinese goods would increase. However, such a move might shake foreign confidence and Chinese exports are growing fast in any case.
(Updated October 1, 1999)
|Source||Seth Faison, "Fearing Deflation, Chinese Set Limits On New Factories," The New York Times, August 19, 1999.|
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