July 25, 2013

Growth in China is Good for the US

Veronique de Rugy

Senior Research Fellow
Summary

Reports of renewed growth in China have sparked questions about the impact on the United States of a healthier Chinese economy. Specifically, if China does better, do we in the U.S. do worse? I don’t think so.

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The New York Times Room for Debate posted this question:

The Chinese economic model “is about to hit its Great Wall,” according to Paul Krugman. And yet a new Pew Report reveals that a growing number of people believe that China “will eventually supplant the United States as the world’s dominant superpower,” despite the U.S. being the preferred “partner” among most other countries.

The debate about China’s rise and the decline of the U.S. continues. But is there perhaps space for two dominant players on the world stage?

Veronique de Rugy provided the following response:

Reports of renewed growth in China have sparked questions about the impact on the United States of a healthier Chinese economy. Specifically, if China does better, do we in the U.S. do worse? I don’t think so.

I’ll first note there are signs the Chinese economy may actually be slowing down. As the Financial Times’ Kate MacKenzie wrote on China’s economy last week: “Double-digit growth is long forgotten and even high single-digit growth is above the consensus.” She adds that talk of “an outright economic contraction” isn’t unreasonable.

However, even if China were about to experience a renewed economic boom, it wouldn’t necessarily be bad for the United States. For one thing, we rely quite heavily on China buying U.S. Treasuries. A Chinese recession could lead to a slowdown in their lending abilities, which could raise our borrowing costs.

Second, while the U.S. government is on an unsustainable long-term fiscal path, our economy is showing signs of resilience and modest growth. Better days may be ahead, set off by serious growth in industries like energy production (brought about in part by an impressive fracking revolution) and technology.

Finally, investors rate investment possibilities on a curve. So while the United States may not be in great shape and our government may be running large deficits, as long as buying our debt appears less risky than buying that of other nations (who may seem to be in better relative position on paper — think about China running a surplus), investors will likely continue to invest here. This is particularly true in the current global environment, where European countries are struggling, China isn’t growing as fast as it used to, and most of the world’s economies remain depressed. Even after the 2011 credit downgrade, the U.S. bond market remains the largest in the world and our treasury market is still the most liquid and transparent.

The bottom line is that the United States should not worry about the potential of a strong Chinese economy. In fact, rather than fearing harm from growth in any nation’s economy, we should welcome the innovation, lower prices and better quality goods and services that healthy competition generates.