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May 6

How China's Inflation will Effect Wall Street

Posted by Bill at 08:00 | Others | Comments(0) | Reads(6710)
China is now the second largest economy in the world, trailing only the United States. Over the past few years they have seen a noticeable increase in inflation that is threatening their status as a low cost production hub. Most, if not all of the world’s highest regarded economist believe that they are considerably under reporting their actual inflation figures, which makes this dilemma even more perplexing.

china inflationChina has experienced many reported and unreported riots over the cost of food, which is increasing at an alarming rate. The government is working very hard at lowering food cost, and keeping inflation at a manageable rate. However, many experts in this field think they are fighting an uphill battle, if not a losing one all together.

If the government is not able to get this under control very soon, this could be quite bad news for Wall Street. Quite a few of the world’s largest manufactures, like General Electric, Ford, Toyota, General Motors, and Nissan have invested billions upon billions of dollars in China, because of their low cost manufacturing capacity.

If these companies are forced to relocate their facilities, or shut them down completely, their financial statements will need to incur quite substantial losses because of this. This of course will be eventually reflected in their stock prices, which will only drag Wall Street down even further.

Already we are seeing some company’s relocate their factories from the coastal towns, to the inner parts of the country where wage prices are lower, and provide more stability. This increases the price of the final product over their initial projections, due to increased shipping cost of raw materials, as well as the completed item.

Other companies that have not relocated to the inner parts of the country have been forced to increase their wages considerably, sometimes having to double them in only a single year. Some US based companies that were planning on relocating their manufacturing facilities to China because of the low cost production capabilities, have changed their plans completely, and have maintained them in the US.

How this is all going to play out on Wall Street over the next few years is still up in the air. But, there are a few things that are certain. First, the worldwide consumer will have to pay more for goods that are coming out of China. Second, the multinationals manufacturers that are based there will never receive the full price benefits that initially expected when they made their decision to relocate there.

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