As residents of the North Bay, we care about consuming locally-produced goods and patronizing our neighbors’ businesses. Even with our community’s commitment, it seems we are still inundated with goods imported from China. For most Americans, consuming Chinese-made goods is just part of life. Does China’s rising prominence threaten our economic well-being?
China is the second largest economy in the world after the United States as measured by gross domestic product (GDP), the sum of all goods and services produced. Over the last 30 years, China’s development has been a remarkable story of growth and transformation. The evolution from a centralized, government-controlled economy to a modern-day capitalist market is far from complete.
For many years, the United States has imported a large amount of goods from China without an offsetting export trade of U.S. produced products. As a result of this long-standing trade imbalance, China now owns over 23 percent of total U.S. public debt, according to U.S. Treasury data. This concerns many who believe that China owns enough Treasuries to cause economic harm to the U.S. by selling dollar-denominated securities in a disorderly way.
Is this likely to happen? I’ll go out on a limb here and say “probably not,” as the intertwining of the U.S. and Chinese economies has created a very complex and delicate relationship. The United States is an important export market for China, consuming roughly 20 percent of all Chinese production. Economic theory predicts that the high demand by U.S. consumers would cause the prices of Chinese goods to rise, eventually making those goods too expensive for U.S. consumers. As a result, consumers would eventually turn to cheaper goods manufactured in the U.S. Over the past few years, instead of allowing the value of Chinese goods to rise, China has carefully controlled the value of its currency by purchasing vast amounts of dollar-denominated assets.
This creates an unofficial peg to the U.S. dollar that keeps the value of the Chinese currency on par with the dollar. By controlling its currency appreciation, China assures that their goods will continue to be attractively priced for U.S. consumers. This is one of many reasons that we have experienced low levels of inflation in the U.S. economy.
For China, a rapid sale of dollar-denominated securities is likely to cause more harm than good as an economy that is attempting to emerge from years of state control. Among the potential outcomes would be a decline in value of China’s remaining U.S. dollar holdings. A second is that sales would likely precipitate a rise in the value of the Chinese currency that would make exports more expensive to U.S. consumers. A third and more technical point is that sales of bonds, including U.S. Treasuries, would cause the price of the bonds to decline and interest rates to rise. Higher interest rates in the U.S. would make it harder for consumers to finance the purchase of Chinese goods. For these reasons, we believe that China is unlikely to engage in a wide scale sale of U.S. Treasuries anytime soon.
So if we conclude that the U.S. and China will continue to engage in economic detente, what does the future hold for a country that is so dependent on exporting? According to the World Bank, China’s GDP growth was a remarkable 10.4 percent per year from 1990 to 2010. The country’s share of world GDP increased from 1.6 to 8.6 percent during that same time period.