China's Economy Is Strong:
China's economy produced $10.9 trillion in 2010, (based on
purchasing power parity), making it the third largest in the world's (after the U.S. and the
European Union). It's been growing more than 10% per year for the last 30 years.
Despite this growth, China is still a relatively poor country. Its economy only prodcues $7,600 per person, compared to the GDP per capita of $47,400 for the U.S. This low standard of living allows China to pay its workers less, making its products cheaper, which lures overseas manufacturers to outsource jobs there. (Source: CIA World Factbook, China Economy latest figures)
China's Economy Depends on Exports to U.S.:
China exports $1.58 trillion of its production, making it the world's second largest exporter after the EU. China ships 18% of its exports to the U.S., which created a
$272 billion trade deficit in 2011. While China needs the U.S., it's increasing its trade with Hong Kong (13.8%) and
Japan (7.6%). It's encouraging trade with African nations, investing in their infrastructure in return for oil. Finally, China is increasing trade agreements with other Southeast Asian nations, and with many Latin American countries.
What Does China Export?:
China does a lot of manufacturing for foreign companies, including U.S. companies. The raw materials are shipped to China, where factory workers build the final products and ship them back to the U.S. In this way, a lot of China's exports are really for American companies for American consumers. China primarily exports electrical and other types of machinery, especially computers and data processing equipment, as well as optical and medical equipment. It also exports apparel, fabric and textiles. It
imports raw
commodities from Latin America and Africa, such as oil and other fuels, metal ores, plastics and organic chemicals.
China Is the Largest Foreign Owner of U.S. Treasuries:
As of November 2011, China owned $1.132 trillion in U.S. Treasury
bills, bonds and notes. This is 23.8% of the total $4.8 trillion of debt held by the public. China has cut back a bit, from its peak holdings of $1.173 trillion held in July 2011.
Nevertheless, China is the largest foreign holder of Treasuries. China does this to support the value of the dollar. China pegs its currency (the yuan) lower than the U.S. dollar to keep its export prices competitive.(Source: U.S. Treasury, Major Foreign Holders)
China's role as America's largest banker gives it leverage. For example, China threatens to sell part of its holdings whenever the U.S. pressures it to raise the yuan's value. China counters by saying it did raise the yuan's value by 20% between 2005-2010. For more, see What Is the U.S. Debt to China?
The U.S. Accuses China of Unfair Trade Practices:
The U.S. Department of Commerce often threatens to apply penalty
tariffs to Chinese products. For example, in 2007 it accused China of "
dumping" its paper exports into the U.S. The Commerce Department claimed that China unfairly provided subsidies of 10-20% to its manufacturers of glossy paper used in books and magazines. Trade volume had grown 177% in one year. The U.S.-based New Page Corporation 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 is working with China to lower the trade deficit.
China's Stimulus Plan:
During the
financial crisis of 2008, China pledged 4 trillion yuan, about $580 billion, to stimulate its economy to avoid
recession. The funds represented 20% of China's annual economic output. It went towards 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 urbanites. It 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)
(Article updated January 26, 2012)
