Published: Nov 15, 2007 in Knowledge@Emory
The expanding Chinese economy is affecting Americans–and people from other nations–in profound and complicated ways. Finance and marketing experts at Emory University’s Goizueta Business School explore the impact of China’s growth and influence.
According to Jeffrey Rosensweig, associate professor of finance at Emory University’s Goizueta Business School and director of the Global Perspectives Program, the Chinese economy packs a “one-two punch: the world’s largest population also has maintained the fastest economic growth rate during the past nearly 30 years.” China, he notes “will lead the world in exports in just a few more years.”
The effect of this shift on American workers and consumers is mixed. As Rosensweig explains, “Chinese imports keep pressure on U.S. producers because such imports are often relatively cheap. They squeeze the ability of others to raise prices. All this keeps a lid on inflation, which in itself helps keep interest rates low. Of course, for the consumer, this can all be a great thing–as seen by the low prices offered by two major importers from China: Target and Wal-Mart.”
This pressure on American competitors moderates prices for many staples such as clothing, electronics and toys, which in turn discourages inflation.
However, the stabilizing effect of Chinese imports doesn’t extend to the entire U.S. economy, notes Jeffrey Busse, associate professor of finance at Goizueta. Significant portions of the economy, such as services and existing home prices, are rarely affected by the level of imports.
China’s dependence on oil is impacting oil prices. Chinese manufacturers use oil as a raw material and a power source, just as American manufacturers do. In addition, the cost of other commodities–such as steel, timber and concrete–-is also rising, notes Busse, because the quickly growing Chinese economy is bringing a Western-style standard of living to increasing numbers of Chinese citizens. China’s growing use of construction materials is driving up the cost of building worldwide.
Another powerful effect of China’s growth in imports is its increase in financial might. As Rosensweig observes, China “will lead the world in exports in just a few more years. Booming growth in export revenues is leading to a trade surplus which will also soon lead the world. If a nation exports $250 billion more than it imports, it is also accumulating a great deal of dollars.”
For instance, China’s central bankers are investing a large portion of the country’s foreign-exchange reserves in U.S. government securities.
“This has a positive impact on almost all 300 million U.S. residents,” observes Rosensweig. “It keeps interest rates low by supplying funds.” Thus, although federal spending has increased dramatically in the last few years, the 10-year Treasury bill rate is significantly lower today than it was when the current President Bush took office. This low rate not only decreases the cost of government borrowing; it keeps down interest rates for corporate loans and for mortgages and credit cards.
The inflation benefit does have a downside, professors say. Chinese investment in U.S. government debt also puts America in a vulnerable position. “If China ever wanted to bring the U.S. financial system to its knees, suddenly selling off even a sizable portion of those securities could send interest rates soaring,” observes Rosensweig. Even if China never does this, the U.S. will pay China increasing amounts of interest, as its debt grows.
China, however, doesn’t need a hostile reason to decrease its investment in Treasuries. The falling dollar is eroding the value of these assets; whereas China’s holdings in other currencies, like the Euro, are appreciating. The Chinese central bank can also get higher returns from U.S. corporate securities, not to mention by investing in emerging markets. China might even decide to spend some of this money on its own people, to improve its physical or technological infrastructure or to care for its elderly.
On the other side of the ledger, huge amounts of American investment dollars are flowing into China, where, as Busse notes, “the returns have been enormous.” But with the recent rash of product recalls from China, should American businesses seek other options?
Jagdish Sheth, a chaired professor of marketing at Goizueta, believes China will learn from recent scandals. “This has been a great wake up call for Chinese manufacturers and U.S. importers,” he maintains. According to Sheth, the Chinese government is eager to improve the quality of local products, so the stamp “Made in China” will inspire as much consumer confidence as “Made in Japan, South Korea or India” does. Sheth predicts that Chinese officials will begin to seriously monitor and regulate exported products to improve their country’s reputation. As China’s growth and influence continues to expand, its global impact will reverberate literally around the world.