China has 1.38 billion people, more than any other country in the world. China is still a relatively poor country in terms of its standard of living. Its economy only produces $16,600 per person, compared to the U.S. gross domestic product per capita of $59,500.
The low standard of living allows companies in China to pay their workers less than American workers. That makes products cheaper, which lures overseas manufacturers to outsource jobs to China. They then ship the finished goods to the United States, China’s largest trading partner.
Components of China's Economy
China built its economic growth on low-cost exports of machinery and equipment. Massive government spending went into state-owned companies to fuel those exports. These state-owned companies are less profitable than private firms. They return only 4.9 percent on assets compared to 13.2 percent for private companies. These companies dominate their industries.
China developed cities around these factories to attract workers. As a result, one-fourth of China's economy is in real estate.
The government also funded construction of railways and other infrastructure to support growth. As a result, it imported massive amounts of commodities, like aluminum and copper.
In 2013, it launched the One Belt, One Road Initiative, the largest global infrastructure project in history. China will spend $150 billion a year to link 68 countries along the old Silk Road with Europe. It will build ports, railways, and pipelines. It plans to make a China-dominated Eurasia an economic rival to the American-dominated transatlantic trading area.
China's president, Xi Jinping, hopes the project will accomplish three objectives:
1. Provide investments for China's foreign exchange reserves. Most of them are tied up in low-return U.S. Treasurys.
2. Provide new markets for China's high-speed rail firms, and for cement, steel, and metal exports.
3. Stabilize countries on China's western border. Increase China's claims in the South China Sea.
China's Exports
China regained its position as the world's largest exporter in 2017, when it exported $2.2 trillion of its production. The EU briefly took the No. 1 spot in 2016. It now is second, exporting $1.9 trillion. The United States is third, exporting $1.6 trillion.
China shipped 18 percent of its exports to the United States in 2017. That contributed to a $375 billion trade deficit.
China encouraged trade with African nations, investing in their infrastructure in return for oil. It increased trade agreements with Southeast Asian nations and many Latin American countries. That's why President Obama launched the Trans-Pacific Partnership trade agreement. It doesn't include China. One of its goals was to balance China's growing power in the region. In January 2017, President Trump withdrew from the TPP.
China does a lot of manufacturing for foreign businesses, including U.S. companies. They ship raw materials to China. Factory workers build the final products and ship them back to the United States.
China's Imports
China is the world's second largest importer. In 2017, it imported $1.7 trillion. The United States, the world's largest, imported $2.3 trillion. China imports raw commodities from Latin America and Africa. These include oil and other fuels, metal ores, plastics, and organic chemicals. It's the world's largest importer of aluminum and copper.
China’s commodity consumption has fueled a world-wide boom in mining and agriculture. Unfortunately, suppliers over-produced, creating too much supply. As a result, prices cratered in 2015. As China's growth slows, prices for commodities used in manufacturing, such as metals, will drop.
How China Affects the U.S. Economy
China is the largest foreign holder of U.S. Treasurys. In July 2018, China owned $1.17 trillion in Treasurys.
China buys U.S. debt to support the value of the dollar. This is because China pegs its currency, the yuan, to the U.S. dollar. It devalues the currency when needed to keep its export prices competitive.
China's role as America's largest banker gives it leverage. For example, China threatens to sell part of its holdings whenever the United States pressures it to raise the yuan's value. Since 2005, China raised the yuan's value by 33 percent against the dollar. Between 2014 and 2016, the dollar's strength increased by 25 percent. The rise forced China to devalue the yuan. This ensured its exports would remain competitively priced with those from Asian countries that hadn't tied their currency to the dollar.
Trade tensions between the United States and China are rising. For more insights, read US-China Trade Wars And How It Affects Americans.
Why China Is Deliberately Slowing Its Growth
In August 2018, China's spending on fixed assets such as factory machinery and public works slowed to its lowest point in 20 years. In 2017, China's economic growth rate slowed to 6.8 percent. Before 2013, China enjoyed 30 years of double-digit growth. But government spending was the driving force that fueled it. The government also mandated its banks provide low interest rates in return for protection of the strategic industry. It created business investment in capital goods. It also led to inflation, a real estate asset bubble, growth in public debt, and severe pollution.
The government's emphasis on job creation left little funding for social welfare programs. As a result, the Chinese population was forced to save for retirement. They didn’t spend, strangling domestic demand. Without robust consumer spending, China was forced to rely on exports to fuel growth.
How China Avoided the Great Recession
During the financial crisis of 2008, China pledged 4 trillion yuan, about $580 billion, to stimulate its economy to avoid the recession. The funds represented 20 percent of China's annual economic output. It went toward low-rent housing, infrastructure in rural areas, and construction of roads, railways, and airports.
China also increased tax deductions for machinery, saving businesses 120 billion yuan. China raised both subsidies and grain prices for farmers, as well as allowances for low-income urban dwellers. Its central bank also dropped interest rates three times in two months.
It eliminated loan quotas for banks to increase small business lending. But now China's companies are struggling to repay that debt.
Edited by: 浪子
Bibliography
Kimberly Amadeo. (2018). China's Economy and Its Effect on the U.S. Economy. Retrieved from
https://www.thebalance.com/china-economy-facts-effect-on-us-economy-3306345
China's Economy And Its Effect On The U.S. Economy
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October 08, 2018
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Reviewed by 浪子
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October 08, 2018
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