June 22, 2018
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China’s slowdown: good or bad?

By Lei Chen, Wuhan University

Some people see the recent slowdown in the Chinese economy as good news for the United States and other western economies. But those who subscribe to the “misery enjoys company” theory forget that good news for some isn’t necessarily good news for all.

On the negative side of the ledger, a slowdown in China means that China’s demand for U.S. goods may not grow as quickly as it has in recent years. While this may be bad news for certain U.S. exporters, the truth is that U.S. exports to China are only about 0.6 percent of U.S. gross domestic product. So a modest adjustment in these exports should have little impact on the U.S. economy.

On the plus side, the slowdown means that China’s demand for natural resources will fall. This is good news for U.S. consumers and manufacturers because the price of natural resources, such as crude oil, should decrease accordingly.

It is commonly agreed that for every $10 change in the price of oil, U.S. GDP moves approximately 0.2 percent in the opposite direction. So, if crude oil prices were to decline from more than $96 a barrel today to $86 a barrel, the U.S. economy, on an annualized basis, would receive a boost of about $26 billion.

Another boon to the American economy will come from appreciation of China’s currency. In October, the U.S. Senate passed an international trade bill that would establish U.S. tariffs on imports from countries with undervalued currencies. Because the yuan is believed to be one of the undervalued currencies, the act aims to force China to increase the value of the yuan — as it already has been doing to reduce inflationary pressure.

Economists from UBS Securities, Thomson Reuters, and JPMorgan Chase all predict a more than 5 percent appreciation of the yuan this year, with more to come.

Currency appreciation increases the prices of Chinese products and makes them less competitive in the global market. This makes U.S. products — and those produced in Canada, Mexico and elsewhere — more attractive.

Consider Zhejiang Pujiang Libahuang Bicycle Co. Ltd. The company is a leading Chinese manufacturer of bicycles, electric scooters, carbon bicycle frames and other bicycle parts. It exports to Japan, the United States, Australia, South America and Europe and had sales of $125 million in 2010. Its main customer, according to the company’s website, is Walmart.

When the value of the yuan increases, its products become more costly to overseas buyers. This year alone, because of the appreciation of the yuan, orders have declined by 10 percent from last year. From July 2008 to June 2010, the exchange rate of the yuan to the U.S. dollar stayed around 14.6 cents for one yuan. Currently, one yuan is worth about 15.7 cents. If the exchange rate rises to 16.7 cents, the company says it won’t be able to make a profit.

While a slowdown in China will have a moderately positive impact on the United States, many other countries will not be as fortunate. For natural-resource exporting countries such as Australia, Brazil, Canada, Indonesia and Russia, for example, shrinking demand from China will have negative impacts.

China’s major trading partners in Asia, such as South Korea and Japan, also will suffer. Unlike America, each of these countries has a trade surplus with China, and the volume of exports to China means a lot to each country’s GDP.

For European countries, both challenges and opportunities arise out of the slowdown. Germany, for example, has a trade surplus with China. China is also its third-largest trading partner. In the first quarter of 2011, Daimler AG and BMW together sold more than 100,000 cars in China. The Chinese market is also a major target for luxury brands from France and Italy. While appreciation of t he yuan will make their products comparatively more affordable, manufacturers in these countries will feel the pinch as China’s economy slows down.

China’s quick recovery from the 2007 worldwide financial crisis showed the power of China’s economic engine. China now needs to guide its economy into a healthier growth path.

Lei Chen is a visiting research fellow at the American Institute for Economic Research in Great Barrington, Mass., and an associate professor of economics at Wuhan University in China.

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