Monday, January 24, 2011

China Cockpit: Flood the Market With Counterfeits To Fight Inflation

Imagine China Government Airlines, where the Chinese government is trying to pilot its citizens from poverty to wealth in a way that those sitting in different classes (such as the superpremium class with private beds and the class where you have to stand all flight)will stay harmonious. It's interesting to think what decisions the pilots make in the cockpit.

To make a country the size of China and with such an immense contrast between rich and poor develop in the right direction seems to be a gargantuan challenge. You can say a lot about the Chinese government, but they did lift millions out of poverty during decades of economic growth. How did you they manage this. Western style democracies are marked by sudden changes in policies every time the politic colour changes in cabinet. China's economic policies are much more long term and have proven to be able to absorb bumps in the road because of the financial crisis.

Are the central and local authorities doing what they need to do? Or is China having a lot of luck? Sometimes I think that the central authority is coordinating the decisions of all the ministries in a way that might be compared to the decisions made in a cockpit.

During president Hu's visit to the U.S. (January 18-21, 2011) the relative worth of the Renminbi in relation to the U.S. dollar was discussed. But as president Obama pointed out also other issues unrelated to currency "that must make sure that our trading relation is fair and a win-win situation as opposed a win-lose situation." Obama made a reference to progress in the field of government procurement process, which is getting more open and fair to US businesses according.

Obama: "Some of [the issues unrelated to currency] has to do with intellectual property protection. So we were just in a meeting with business leaders and Steve Balmer of Microsoft pointed out that their estimate is that only one customer in every ten of their products is actually paying for in China. And so can we get better protection? Because that is an area where the U.S. excels: intellectual property and high added value products and services. "And the Chinese government has, to its credit, taken step to better enforce intellectual property We got further agreement as a consequence of his state visit and I think president Hu acknowledges that more needs to be done."

However, if one peek into China's cockpit, you might get a different picture. In order to keep China's plane on course it might loosen up on IPR enforcement: Because China's currency is not freely convertible, there is no direct link between the money in the country and the value of the currency. The money supply in China is too high, therefore inflation is on the rise. So in order to not make the products more expensive, one can flood the market with very low cost products in high volumes: counterfeit and pirated goods could be candidates for fighting inflation. To stimulate China's domestic demand, as the U.S. recommends, will only increase China's inflation.

Around 35 minutes Obama is talking about IPR.

What do you think?

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