China's Economy Is Strong:
China's average annual rate of growth of 10% has contributed nearly 30% of total global growth. In 2008, its economy stood at $7.8 trillion, making it the world's third largest economy after the EU and U.S. China is the fourth largest producer of automobiles.
However, its standard of living is still low, with a GDP per person of $6,100 per person, compared to $40,000 per person for the U.S. This allows the country to pay its workers less, which makes its products lower-priced than its competitors. In addition, China keeps its currency (the yuan) lower than the U.S. dollar, allowing it to price products even lower.
The U.S. Is China's Most Important Customer:
China ships 20% of its exports to the U.S., which has created a
$266 billion trade deficit. While China needs the U.S., it is also increasing its trade with Hong Kong (18%) and Japan (8%). It is encouraging trade with African nations, swapping investment for oil. Finally, it is increasing trade agreements with other Southeast Asian nations.
China Is the Largest Foreign Owner of U.S. Treasuries:
As of February 2009, China owned $744.2 billion in U.S. Treasury
bills, bonds and notes. This is 24% of the total of $3.1 trillion held by foreigners. China surpassed Japan as the largest foreign owner in September 2008. China does this to support the value of the dollar and keep the yuan low.(Source: U.S. Treasury,
Major Foreign Holders)
China is the largest banker to the U.S., which gives it leverage. For example, in August 2007, China threatened to sell part its holdings if Congressional pressure to raise the value of the yuan continued. However, China did allow the yuan's value to rise by 20% between 2005-2008.
The U.S. Accuses China of Unfair Trade Practices:
The U.S. Department of Commerce often threatens to apply penalty tariffs to Chinese products, accusing China of "
dumping."paper imports from China. For example, in 2007, Commerce claimed that China unfairly provided subsidies of 10-20% to its manufacturers of glossy paper, used in books and magazines. Although the trade volume is only $224 million, (less than .1% of the $288 billion in goods imported from China in 2006) it had grown 177% in one year. U.S. based New Page Corp. brought the anti-dumping case to the Commerce Department, saying it could not compete against subsidized prices.
Henry Paulson Was Hired to Improve the Trade Deficit:
Former U.S. Treasury Secretary
Henry Paulson was initially hired to lower the trade deficit. He initiated the “Strategic Economic Dialogue” to open China's market, especially its banking industry. He did meet with several successes, including:
- Elimination of a 17% tax rebate for exporters.
- An increase in central bank interest rates, increasing the value of the yuan.
- An increase in the reserve requirement for central banks to 12%.
- A $3 billion investment in the U.S. Blackstone Group.
President Obama has also said he will work with China to lower the trade deficit.
China's Stimulus Plan:
In 2008, China pledged 4 trillion yuan, about $580 billion, to stimulate its economy to avoid recession. The funds, which represent 20% of China's annual GDP, will be spent over the next two years. It will go towards low-rent housing, infrastructure in rural areas and construction of roads, railways and airports. China increased tax deductions for machinery, saving businesses 120 billion yuan.
China has raised both subsidies and grain prices for farmers, as well as allowances for low-income urbanites. It has eliminated loan quotas for banks to increase small business lending.
China also took a leadership role in 2008, dropping interest rates three times in two months. Taiwan followed the lead of its largest trading partner by cutting interest rates four times in two months.(Source: Bloomberg, China Unveils 4 Trillion Yuan Spending as World Faces Recession, November 10, 2008)
The stimulus should add 2% to China's economic growth in 2009, keeping it at about 9%. This should help the stock market, which dropped 69% in 2008 as measured by the CSI 300 Index.
