Impact of the Chinese Economy on the U.S. Economy

China (officially People's Republic of China), ruled by a communist government, has experienced abnormal Gross Domestic Product (GDP) growth rate over the past decades. Recent data, however, signal an economic growth slowdown of the Asian giant. What impact would this have on the U.S. economy and the global economy? To answer this question, we assess the economic position of China in the world economy and its relation to the U.S. economy.

China, the most populous country in the world, has the second largest economy ranked just below the United States with a nominal GDP of $12 trillion as of 2018. However, this high GDP does not necessarily indicate the wealth of the country. The country ranked 20 for GDP per capita which was only $15,308 as of 2017. Many global manufacturing companies attracted by low labor costs and cheap supply materials in China locate their manufacturing units in this country. This allows companies to produce goods cheaply, and it explains why many of the products we use in our daily lives are made in China. (To learn more, read: U.S. Vs. China: Battle To Be the Largest Economy in the World.)

China is the third largest export partner (the first and the second being Canada and Mexico, respectively) of the United States, with export goods and services valued at $129.9 billion in 2017, according to The Office of the United States Trade Representative. This makes up about 8.4% of the total exports of the United States. China is also the United State's largest import partner whose imports were valued at $505.5 billion as of 2017 or about 21.6% of the total imports of the United States. Thus, the trade balance of the U.S. with China is negative, and this deficit is financed partly by capital flows from China. China is also the largest creditor of the United States and holds the largest part of the US Treasury securities with an amount of $1.18 trillion as of 2018. According to April 2018 figures from the U.S. Treasury, this is just over 21% of U.S. overseas debt. (For more information, read: The Reasons Why China Buys US Treasury Bonds.)

All of these statistics show the importance of the Chinese economy and why any developments in China, be they negative or positive, influence the world’s largest economy and the world economy overall. 

In 2010, China's economic growth rate began to gradually decline. The GDP growth rate dropped from 9.3% in 2011 to 7.4% in 2014 (see the graph below) and the rate has continued its decline.

Source: Trading Economics

Concerns raised include the possibility that the slowdown in the economy of China will have negative impacts on the markets that are closely related to this economy, one of them being the United States. A decrease in the level of consumer spending will affect U.S. exports negatively, and if the United States is not successful in shifting to other markets, then, based on the GDP formula, a decrease in the U.S. GDP can be expected, at least in the short run.

GDP = Consumption + Investment + Government expenditure + (Export - Import)

With exports decreasing and imports less affected by these negative developments, the deficit in the U.S. balance of trade with China will widen further in the short run. 

Another way that developments in China can evolve unfavorably for the U.S. economy is through the selling off of Treasury securities. The Chinese government may want to sell off part of these securities to use the proceeds for economic stimulus. Potential massive selling of U.S. Treasury securities creates a threat to the U.S. economy as a large supply may dump the price down and drive the yields up for at least the short term. Unexpected increases in interest rates may increase down pressure on GDP growth through lower valuations of investments. (For more, see: What Happens to the Economy If China Deleverages.)

U.S. companies that generate an important portion of their revenues from China are likely to be negatively affected from lower domestic demand in China. This is bad news for both shareholders and employees of such companies. When cost-cutting is necessary to remain profitable, layoffs are usually one of the first options to consider, which increases the unemployment rate.

A Chinese economic slowdown has some positive effects on the U.S. economy. One reason oil prices decreased from high levels was pessimistic expectations for the GDP growth rate in China, the biggest oil importer, with imports of around 8.4 million barrels per day in 2017. One of the biggest beneficiaries of low oil prices is the United States; it is the second biggest oil importer with about 7.9 million barrels in 2017. Lower oil prices positively affect the U.S. trade balance deficit as the cost of the country’s oil imports decrease.

China, with its giant economy, has a huge influence on world economies, particularly those related to China. A decrease in domestic demand in China will most likely adversely impact the world economy and slow down global economic growth. The United States is one of the countries that is likely to be affected from a slowdown in the Chinese economy because of the expected decrease in the export of goods and services to China. However, the negative effects from the economic slowdown are partially offset by lower oil prices.