China's Economy Is Strong:
China's economy produces $9.9 trillion, making it the third largest in the world's (after the U.S.
and the EU). 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 produces $7,400
per person, while the U.S. produces $47,400 per person. This low standard of living allows
China to pay its workers less, making its products cheaper, which lures overseas manufacturers
to outsource jobs there.
China's Economy Depends on Exports to U.S.:
China exports $1.5 trillion of its production, making it the world's second largest exporter after
the EU. China ships 20% of its exports to the U.S., which created a $252 billion trade deficit in
2010. While China needs the U.S., it's increasing its trade with Hong Kong (12%) and Japan
(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 Is the Largest Foreign Owner of U.S. Treasuries:
As of November 2010, China owned $895.6 billion in U.S. Treasury bills, bonds and notes. This
is 32% of the total of $2.8 trillion held by foreigners. 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 is America's largest banker, giving 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.
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. Commerce
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. 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 is working 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 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)
