China's Economy Is Strong:
Despite this growth, China is still a relatively poor country. Its economy only produces $9,100 per person, compared to the GDP per capita of $49,800 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 ships 17% of its exports to the U.S., creating a $315 billion trade deficit in 2012. While China needs the U.S., it's increasing its trade with Hong Kong (14.1%) and Japan (7.8%). 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 Is the Biggest Banker to the U.S.:
China temporarily cut back on its holdings after July 2011, when it held $1.173 trillion. By June 2012, it only held $1.147 trillion.
China buys U.S. debt 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. Accused China of Unfair Trade Practices:
In 2007, the Commerce Department threatened to apply penalty tariffs to Chinese products. For example, 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:
- 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.
HOw China Avoided the Recession:
China also took a leadership role by 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 March 26, 2013)