Chinas Economy and the U.S.-China Economic Relation Dr. Gene H Chang The Asian Studies Institute and Economics Department University of Toledo ©

China’s Economyand the U.S.-China Economic Relation

Dr. Gene H ChangThe Asian Studies Institute

andEconomics Department

University of Toledo

©

The U.S. and China

Basics of ChinaChina U.S.

Statistics World Ranking

Statistics World Ranking

Population 1330 million 1 305 million 3

Area (sq km) 9.6 million 4 9.8 million 3

Climate Diverse but most temperate Diverse but most temperate

Topography Mostly mountainous Mostly flat

Renewable water 2829 cu km 6 3069 cu km 4

Economic size (GDP)

6 trillion $ 3 15 trillion $ 1

Life expectancy at birth (years)

73.5 105 (of 223 entities)

78.1 50 (of 223 entities)

Human development Index

0.902 4(of 169) 0.663 89(out of 169)

US and China: Important Relationship

China becomes increasingly important to the U.S. because of

… … its economy … …

Integration between the U.S. economy and Chinese economyDisputes over trade and economic issuesDisputes over other issues, from environment, human rights to military presence

China: truth and mythThe size of the China’s economy

China’s dynamics

China as a challenge to the U.S. in the 21st century

China’s own problems and weakness

The U.S. strategic relationship with China in the 21st century

Top trade partners of the U.S.(2011)

Country Total Trade Volume

(Billion $)

1 Canada 597.4

2 China 503.2

3 Mexico 460.6

4 Japan 195

5 Germany 147.5

http://www.census.gov/foreign-trade/top/dst/2010/12/balance.html

US Imports from China

Made in China

Flying into the future: Boeing's next-generation 737-700 is China-bound.Picture: AFP

China buys 200 Boeing aircraftIn JANUARY 2011 THE US SIGNED A $45BN EXPORT DEAL WITH CHINA, THE TRADE DEAL INCLUDES A $19BN PURCHASE OF 200 BOEING AIRCRAFT.

World´s Largest McDonalds in Beijing

US exports to China

GM's China sales top U.S. total,a first for the automaker

2001

2003

2005

2007

2009

02468

101214161820

2.343.3

4.7 5.1 5.77.28

8.899.34

13.79

18.06

Automobile sale in China(million units)

GM sold more cars and trucks in China than it did in the U.S. in

2010, marking the first time that a foreign market has outpaced the automaker's domestic sales in its

102-year history.

Top trade partners of the U.S.(2011)

Country Trade Deficit(Billion $)

1 China 295.4

2 Mexico 65.6

3 Japan 62.6

4 Germany 49.3

5 Canada 35.6

6 Saudi Arabia 33.7

Why China is a big trading partner of the U.S.?

Comparative advantage: China has cheap and productive labor– But why not other developing countries?

Gravity model, the size of the Chinese economy– But China is distant away

A stable but undervalued currency peg to the U.S. dollar– But what about other Southern American countries

that also use dollars?

Size of the Chinese EconomyGDP by exchange rate (2011)

(billion $)

Series1

1430

1885

2518

2246

2481

2808

3629

5855

6989

15,060United States

China

Japan

Germany

France

United Kingdom

Italy

Brazil

Russia

India

Average annual growth rate (1980-2009)

1

1.99

2.19

2.69

2.81

2.83

6.1

6.13

10China

India

South Korea

Russian Federation

World

United States

Japan.

EU

The quick rise of the Chinese economy

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

2000

4000

6000

8000

10000

12000

14000

16000

China

Germany

France

United Kingdom

Japan

United States

China

China’s contribution to global growth

China now contribute more to the global economic growth than the U.S.– China’s GDP x growth rate = 574 billion $– The U.S. GDP x growth rate = 393 billion $

If the trend continues …

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

5000

10000

15000

20000

25000

30000

China

Germany

France

United Kingdom

Japan

United States

U.S.

China

If the trend continues …

If the trend continues, it is estimated that China would overtake the U.S. to become the largest economy by the year of 2020.

The fast change in the ranking of China is due to two reasons– the higher economic growth rate, say, at a

sustainable of 10%– the restoration of the true value by the

undervalued Chinese currency RMB.

True size of the Chinese Economy

GDP by Purchasing Power Parity (2010, billion $)

Series1

1549

2146

2181

2182

2218

2932

4001

4308

10084

14624

United States China

Japan India

Germany Russia

Brazil U.K.

France Mexico

Foreign exchange reserve(billion dollars, Dec. 2010)Chi

na

Japa

nEur

o Zo

neRus

sia

Saudi

Ara

bia

Taiw

an

Indi

a

U.S.

0

500

1000

1500

2000

2500

Germany, 589

India, 787

Russia, 983

Japan, 1009

China 3221

U.S., 4110

Canada, 614

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Electricity production (billion kwh, 2008)

China, 4140, 2010

Electricity production is often used as a proxy for GDP at PPP for countries

Automobile production (million vehicles)

China Japan U.S. Germany Korea Brazil India0

2

4

6

8

10

12

14

16

18

20

2000

2005

2010

Figures include passenger cars, light commercial vehicles, minibuses, trucks, buses and coaches

Automotive production is a proxy for manufacturing activities

China, 568 million tons

46.55%

European Union; 11.40%

Japan; 7.17%

Russia; 4.91%

U.S.; 4.76%

India; 4.64%

Korea; 3.98%

Others; 16.57%

World Steel Production 2009

Steel production is a proxy for fixed capital formation and housing construction (investment goods)

Food production 2008 (m tons)

China U.S. India Russia Brazil0

50

100

150

200

250

300

350

400

450

Grain, cereal Meat

Fish

Measures the agricultural output

New Residential Building Construction (million square meter per month 2010)

China

Russia

Japan

South K

orea

Germ

any

0

10

20

30

40

50

60

UN monthly bulletin. U.S. adopts the unit of “set” thus not comparable

Construction everywhere

High speed rail

How should the U.S. meet the challenge?

China poses a challenge for the U.S. in the 21st century.

What is important is how the U.S. should adopt a better strategy and policy to meet this challenge.

To maintain the lead in the global economy, the U.S. should rely on the market system, but also understand that the government’s active role cannot be diminished in correcting market failures.

China is weak

China is still poor, GDP per capita is low.Deteriorating environment may not sustain future economic growthChina’s population is aging very quickly in the coming yearsCorruption and inefficiency are rampantChina has a widening income gapChina is unstable and economy remains inefficient because of lack of rule of lawChina lacks of an education system that truly promotes creative research and developmentChina is politically unstable because of lack of democracy and an independent legal system.

China is weak

GDP p.c.

Renewable wate

r

Energy consum

ption

ESI index

Ferterli

ty0

20406080

100120

U.S.

China

Renewable water and energy consumption are on the per capita basisESI is environmental sustainability indexFerterlity: U.S. 2.05; China: 1.79

China’s demographic time bomb

Income gap

Country Gini Coefficient (the higher the worse)

Sweden 23

Taiwan 33

United Kingdom 34

U.S. 45

China 46.9

Brazil 56.7

Lack of free information flow

Scholars in China cannot even access wikipedia.org hence much of information Needed for modernization is lost

Lack independence of judiciary and no rule of law

Private property is still not well protected

That scares many private entrepreneurs. They are seeking emigration to the West after they have money, thus billions of dollars of capital flies back to the U.S.

The party determines everything hence impeding independent thinking, entrepreneurship and creativity.

Rampant corruption and waste

Corruption in China growing at least as fast as the economy ，（ John Garnaut, Beijing ）Railway Minister Liu is arrested for corruption

Chinese politician Bo Xilai's wife accused of murdering UK businessman over business interests

Lack of transparency and democracy to vent people’s

grievance, causing the system fundamentally unstable

A call for political reform from the party

China Daily has just reported Premier Wen Jiabao reaffirming political and economic reforms. On the table are government transparency, creating conditions allowing people to criticize and supervise the government, and media being a watch-dog.

But it is widely said that Wen represents only the minority in the party and the conservatives are dominant

ConclusionChina is a large economy with a big momentum. China is still a poor country with many domestic problems, it will remain substantially behind the U.S. in per capita term for many years ahead.China is dynamic. The norm would be surprises and uncertainties. Do not be surprised if one day you wake up and hear that China overtakes the U.S. in some areas, or, you hear there is a political uprising and the system is in a crisis and breaks down.The best hope for China by the rest of the world is that it gradually moves forward to economic prosperity and political democracy.The relationship of the U.S. and China is one of the most important in the world in the 21st century. We need to enhance our understanding of China and form a better strategy / policy to meet this challenge.

Conclusion: the future generation of China …