It’s not as bad as it looks.
Which is a good thing, says Iris Au, a senior economics lecturer at UTSC, because on the face of it the financial relationship between China and the West can look pretty bad.
For more than a decade the United States (and to a lesser degree Canada and many European countries) has been feeding its consumption-based economy by importing cheap manufactured goods from China.
China’s huge workforce, low-cost, flexible labour market and relatively centralized economy have afforded the country an epic trade surplus. The country as a whole has socked away 40 per cent of this income, placing more than $3.5 trillion in its official reserves account. This reserve has made China a global creditor, with most of that money lent back to the United States.
China is America’s second largest trading partner (after Canada) and its largest creditor. And now, Au points out, China’s economy is weakening.
“Some people are worried about whether they can reach their GDP growth target of 7.5 per cent,” she says. “This rate would be great for a country like Canada, but they have had a double-digit growth in the past.”
And there’s more: as China’s population ages, its workforce is no longer growing, and labour costs go up accordingly. Clothing manufacture has already begun migrating to Indonesia, Bangladesh and elsewhere.
There is a risk that a weakened China could call in its global debts, triggering a new financial crisis in North America. But Au believes this scenario is unlikely.
“I don’t think there will be a major crisis in China,” she says. “There might be a minor adjustment. It’s still a quite centralized economy—the government has the money to prop up the economy if they need it and they are not as consumption-based as North America.”
In contrast, when the bottom dropped out of the American housing market and people cut back on spending it was devastating to America’s consumption-reliant economy.
China’s weakening economy will not likely bankrupt the West. But its economic dominance is having an equally large, though less catastrophic, effect. China is expected to overtake the United States as the world’s largest economy soon. This represents a major shift in power and status, but it’s a shift that could take decades, Au says.
“China’s economy is huge, but they are still behind on other things—property rights, legal structure and social infrastructure are still mostly not up to Western standards. It will take major reform, and China is doing it slowly, which is good because it gives people time to adjust.”