China's Economy in 2011
In recent years there has been considerable debate regarding the economic relationship between two of the world's biggest economic powers—the United States and China. That discussion once again intensified ahead of the visit by China’s President Hu Jintao in the third week of January. While China continues to make great strides in transforming from an export-led to a technology-oriented economy, the U.S. continues to demonstrate impatience with China's gradual approach to allowing its currency to rise.
On January 10, 2011, the National Committee on United States-China Relations hosted a group of prominent Chinese economists at a forum in New York titled, “China's Economy in 2011: Forecast and Analysis from Leading Chinese Economists.” Speakers included scholars such as Fan Gang at Peking University, the director of China’s National Institute of Economic Research, and Lu Feng, director of the China Macroeconomic Research Center at Peking University, and other notable economists, whose views have significantly influenced Chinese political leaders.
The trade surplus and the exchange rate were some of the prominent issues discussed at the Forum. Washington has pressed Beijing for years to allow the yuan to rise more rapidly in an effort to reduce China’s exports, narrow the trade gap, and deploy China’s $2.8 trillion foreign reserves. But, according to Yao Yang, director of the China Center for Economic Research (CCER), the appreciation of the Chinese currency would not be as significant a factor in reducing the U.S. trade deficit and creating jobs as the United States government contends.
China's trade surplus with the United States in 2007 stood at $206.6 billion. It declined to $143.4 billion in 2009 because of shrinking external demand resulting from the global financial crisis. According to Yao, 44 percent of the 2009 surplus was contributed by U.S. companies operating in China, and 20 percent by other foreign companies in China. Yao said the iPhone itself, a product assembled in China by a U.S. company, alone accounted for $1.9 billion of China's trade surplus with the United States in 2009.
Yao explained that, according to a CCER model co-developed with a U.S. institution, if the yuan appreciates by 5 percent against the dollar, the U.S. employment rate will rise by only 0.03 percent; more surprisingly, even if the yuan appreciates by 20 percent, this would only give rise to a modest increase in U.S. employment of 0.16 percent.
Further, effects of the yuan's appreciation on U.S. consumption may also be negligible. According to the CCER model, U.S. consumption would only increase by 0.02 percent, given a 10 percent appreciation of the Chinese currency against the dollar.
Fan Gang stated that if the U.S. wants to solve the trade surplus issue, it should loosen its export controls and high technology transfer policies since China remains hungry for high technology products and services.
The speakers also presented important forecasting data regarding China’s economy. Qin Xiao, chairman of the Board of Boyuan Foundation, focused on longer term economic trends noting that, in the next 30 years, China would not be able to continue to sustain its scale dividend, which it has enjoyed during the past 30 years. Rather, China’s future economic growth would be endogenous, driven by productivity and institutional dividend. Although the widely prevalent forecast on China’s 2011 GDP growth is about 9 percent, Qin predicated that for the next five years, China’s GDP growth would go back to a more modest rate of 7 to 8 percent.
The continuing run-up of housing prices in China has received considerable attention from economists in the United States and China. Many believe that China’s housing market is a bubble poised to burst. However, Yiping Huang, professor of economics at Beijing University, believes that the housing bubble, if it exists, is not an immediate threat since mortgage loans issued by Chinese banks accounts for only 12 percent of the total outstanding loans.
Despite the unpredictability of China’s economic policy and development, many continue to anticipate a surge in China’s investments in the United States by private Chinese companies in the near future. China’s large current account surplus has contributed to the inflationary pressures in China. Partly to address the concern over inflation, the Chinese government continues to make policy changes, including the liberalization of yuan exchange regulation, to encourage China’s investors and enterprises to invest abroad. Perhaps China and the United States may soon be moving toward a new paradigm of trade balance.
The authors of this article attended the January 10, 2011 Forum, which was held at the New York Stock Exchange, as guests of the National Committee on United States-China Relations. For more information on this topic and China-related issues, please contact Gary Biehn (215-864.7007) or Tony Lu (215.864.7006).
