China's Economy

China's economy produced $12.38 trillion in 2012, based on purchasing power parity. This makes it the third largest in the world, after the European Union ($15.7 billion) and the U.S. ($15.66 billion). Its economy slowed a bit, growing "only" 7.8% in 2012, after growing more than 10% per year for the last 30 years.

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 exports $2.021 trillion of its production, making it the world's second largest exporter. (The EU is the world's largest, exporting $2.17 trillion, while the U.S. is third, exporting $1.612 trillion.)

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.

China does a lot of manufacturing for foreign businesses, 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 so-called "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 holder of U.S. Treasury bills, bonds and notes. As of January 2013, China owned $1.264 trillion Treasuries. This is 11% of the total $11.6 trillion of debt held by the public.

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?

China's unfair trade practices was a hot topic during the 2012 Presidential debate. During that debate, President Obama recounted how the U.S. Department of Commerce has successfully brought many disputes to the World Trade Organization, over unfair practices involving tires, steel and other materials.

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.

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.

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 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)