Recent reports of China’s economic growth contrasted with the U.S. economic downturn have left Americans increasingly concerned that China is becoming a new superpower, controls American finances and will surpass the United States as the world’s leading power. The reality is that the fundamentals of the American economy are stronger than China’s, and U.S. prospects are better.
Let’s take exhibit A. It may appear that China contributes the most to world GDP and leads global growth given its 10.7 percent growth last quarter, as well as its 8.7 percent average growth last year. However, that’s not an indicative measure of a strong economy.
Aside from the fact that China’s GDP numbers are illusory (largely because of how the country calculates its GDP), a significant portion of the growth China is experiencing is not creating wealth, it is merely taking it from other countries. In other words, Chinese growth is partly the result of detraction from, not addition to, world GDP, which means much of its success is dependent upon others.
This is because of the way China’s economy is set up. China relies on its trade surplus with the rest of the world as the lifeblood of its economy. It exports vastly more than it imports. Seen in this light, China sucks GDP from other countries in addition to creating its own. Therefore, while it may be leading the world in GDP growth, to a notable extent these GDP gains are the result of China using the world to boost itself higher.
That does not mean, however, that China does not produce anything. To the contrary, over the last couple of decades, China has contributed to the world economy. While China’s production has historically met consumer demand to keep prices low around the globe, the world-wide recession is now causing China to oversupply due to weak global demand, which could lead to deflation. This is hardly an indication of a sound, robustly-growing economy. If China does not start developing more of its own domestic economy for its people, trouble looms.
Further, China is not America’s banker, as many people believe. President Obama’s stimulus package was bad policy, but the notion that China is now funding our economy as a result is a fallacy.
America could get by without China funding its debt. What’s largely unknown is that China officially holds less than 7 percent of U.S. treasuries, and that Chinese bond purchases declined in 2009, to under $100 billion, while our deficit soared to an all-time high of $1.4 trillion.
Moreover, China does not buy our debt for our sake; it does so it because it depends on an economy as large and sound as ours for its own growth propelled through trade: The same set of rules that keep its currency undervalued means, by law, it can’t spend at home the huge pile of cash that it sits on.
In that respect, China is more directly tied to us than we are to them. If the United States were to discontinue trade with China, it would hurt them more than us.
Finally, China is not going to surpass the United States as the world economic leader any time soon. We control about a fourth of the wealth in the world – more than China, India, Japan and the rest of Asia combined. Other indicators are just as definitive. The average American earns close to fifteen times more than the average person in China. If the United States keeps tax rates low, shows spending discipline, and brings the deficit down to promote solid economic growth, there is strong reason to believe that China will never surpass the United States as the world’s largest economy.
China announced last Friday that its economy grew 8.7% last year. Among other things, this will prompt a chorus of claims that China is leading the world out of recession.
Wrong.
The typical way of thinking about this is to take China’s and every other country’s GDP growth, add it all up, and see which economy contributed most to the world’s pile. But that is not the way GDP works.
Consider the case of a country that successfully dictates trade terms such that it extracts a great deal of wealth from its partners. Its GDP would grow very quickly while that of its partners would shrink or grow much more slowly. It would then seem that the predator is leading global growth higher, when it is enriching itself at the rest of the world’s expense.
Behind this possibility is that GDP includes trade. A trade surplus adds to GDP and a trade deficit takes away. China runs the largest trade surplus, which means the rest of the world runs a large trade deficit with the PRC.
Seen that way, China is not adding anything to global growth. Using trade, it is adding the most to its own GDP and taking away the most from the rest of the globe’s.
It need not be so. China could encourage the development of its domestic economy, as it has long been urged to do for its own sake and that of its own people. This would increase demand for goods produced in the rest of the world. Then, and only then, China might actually be an engine for the world economy.
The distinction is between performance and welfare. China is outperforming the world but it is not contributing to global GDP, just the opposite. Some of its gains are intrinsic to offsetting GDP losses for the rest of the world.
Beyond GDP, the PRC has contributed a great deal to the world economy, especially earlier in the decade. Competition is the life-blood of long-term growth, however it is measured, and competition from Chinese goods is arguably the biggest contributor over the past decade to competition in the global economy. In terms of policy, Chinese production kept consumer prices down worldwide, helping to keep inflation low despite high levels of government stimulus around the world.
The financial crisis has changed this, unfortunately. Previously, Chinese supply was helping meeting strong global demand. Now, Chinese supply is threatening to overwhelm weak global demand. Rather than leading, China is using the world to boost itself higher.