On China's Recent Economic Slowdown by Justin Jinorio on Monday, December 12, 2011 at 2:38am This is a natural economic cycle resulting

in a most likely short term recession for China. During the last few years China's booming economy was producing and exporting goods at an increasing rate, but as with all phases of economic expans ion there comes a time when surpluses create a recession. What is going on here, in conduction with the European crisis, is that China has too much supply in re sult of reaching the point where global demand cannot keep up with it, which mea ns that global economies cannot afford to buy all of the Chinese products, nor d o they even want them. This surplus, or excess inventory, will lead China to cut back on production, which also means ensuing layoffs in conjunction with lower prices coming out of China in order to get rid of their excess supply. This is w hat happens in recessions, and they normally run their course until a number of things happen to set up a recovery. First, the excess goods have to be allocated , and if they can't be, because there is no longer demand for them, companies mu st be allowed to go bankrupt so capital can be acquired and allocated to those s ectors where they are most useful, or in other words, where there is demand. The problem is China has a government controlled economy who is involved in the dec ision making process considerably in how their products are made, allocated, and how much is to be produced. This will, without doubt, slow down their recovery, because only the incentives created in a free market can move capital around to where it is most needed, and only the competition created in a free market can create the incentives needed to create these products at the cheapest possible p rice for the consumer and allocate them effectively and efficiently. China's eco nomy has been said to have been opened up in recent years creating more economic freedom, but lets face it, no one really knows for sure how free it is, what th eir outlook on what free is, and whether or not the changes they have made will be enough to be able to storm out of this recession with the rapid growth seen i mmediately following them in free markets. This will be an interesting test for China, but in my opinion they will struggle to overcome this hurdle simply becau se of their lack of freedom and incentive to readjust their production to meat p opular demand in an efficient way. In Russia, for example, shortages and surplus es where quite common and very problematic, not because they had too much or too little of the goods in question, but because government control of the economy, and more specifically their price controls and production quotas, were not only inefficient, they also created a situation where there were no incentives for a nybody to act competently in terms of production and the allocation of those goo ds produced to where they were in dire need. If you were a businessman getting p aid the same amount for your goods, no matter where you sold them, you have no i ncentive to transport them to places that may inconvenience you although those c onsumers may be willing to pay the higher price for these goods in result of sho rtages and their dire need of them, but since the government has placed a ceilin g price on the goods in question, they have no choice but to suffer the conseque nces of poor governmental policy. A perfect example of this was the gasoline sho rtages in the U.S. during the 1970s, when a price ceiling was put on gas for two years creating massive shortages and ridiculously long lines at gas stations. T hese shortages weren't created by a shortage of supply, in fact, the U.S. actual ly bought more gas in those two years then they has ever purchased before in all its previous years. It was the price ceiling which created the shortage by taki ng away the incentives for these businesses to transport gas where it was most n eeded, and on top of that, the lack of competition it created led these business es to stay open almost half as long as they normally would before. My reasoning for citing this example of a homemade shortage created by governmen t price setting, in which I can cite numerous others, is to shine light upon th e fact that China, a highly government controlled economy with which Iâ m sure has nu merous price-controls, may have a tough and long struggle ahead of them as they

try to rise out of this recession. Will the scarce resources of their economy, both goods and people, have the necessary incentives required in order for them to be allocated to the places where they can be most useful, or will the Chinese government get in the way and slow down this process? History tells us that al l socialist/communist economies have failed to do this in the past, unless of co urse through expansion, which is how Hitlerâ s Germany dealt with this issue, includi ng robbing all the Jews. What will China do when their economy reaches its prec ipice? Only the future will tell.