China and Recession - Report Example

China and Recession China is famously known to be a land which did not allow the outsiders to trade in its country. However in the recent years China has allowed the outside world to invest in its country which has changed the level of economics in China. It has lead to the boom of the Chinese economy and furthermore is expected soon of these investments. The trade relationship between China and the United States of America has gone through lots of ups and downs. This trade relationship began in the 17th century when both the countries agreed to trade with each other. However this relationship underwent some hard times when the communist party took over China.1 But it came back on the track in the 1970s when both agree to trade with each other again. This relationship was further enhanced and China adopted the same policies as that of the United States. It encouraged private sector companies to invest more and adopted a stance which America had already adopted. This stance adopted by China has grown since and is now a threat to go beyond the economy of America. This article would further examine the details of this bilateral trading relationship. 2 The trade deficit faced by the United States has risen up since the beginning of the 1990s. In 2004 this trade deficit relative to the Gross Domestic Product exceeded the mark of 5 percent. It is said that this deficit can be very dangerous once it reaches the mark of 4 percent. 3This deficit faced can ultimately fear the investors to run away from the United States economy. The relationship between China and the United States is known to be the most unbalanced. The products imported by the United States from China are more then the exports that are of $202 billion dollars per annum. The trade imbalance among these two countries is enhanced by the facts of China's working force and the consumer base. Most of the population in China still lives in the rural areas. This helps to the fact of lower working wages in China as the rural people in China are demanding less charges for labor. These low wages contributes to the lowering of the prices of the products. And hence the consumers prefer the Chinese products over all the American products4. A new research done in Washington describes the trade deficit with China as a cost to the jobs in the United States of America. This research further found out that millions of jobs were lost due to the low wage workers of China. As the products made by the Chinese companies are cheaper the demand for them is increasing day by day. 5The poor consumers prefer using the Chinese products than that of the Americans; this is because of the lower rate of these products. The prices of clothes and electronics have decreased significantly due to the Chinese companies. The companies of the United States which have not been located in China have suffered major setbacks due to this trade deficit. The garment industry of America has been struck majorly by these blows. Home appliances and electronics are largely being manufactured in China and are being further sold in the United States. Devaluing of a certain currency is done to rectify the problems one country is facing. It can help one country to get over the debts it is facing and would provide a path to the outsiders (civilians) to take advantage. As said by one of the Chinese man when dollar was devalued "I can travel more frequently and stay longer in my favorite cities as the currency is devalued". It helps in achieving the goals of social and economic integrity. Devaluing a currency can help the country to slim its trade deficit, can create jobs for the locals and can boost the exports. 6A situation arose for the United States in which the trade deficit was increasing every fiscal year and some strict action had to be taken against it. In response to this the United States devalued the currency of dollar to adjust to the monetary problems faced by it. This action taken by the United States is thought to have some effect on the relationship between the United States and China. The imports and exports done between these countries are of a significant importance in regard to this action. 21.2 percent of the exports done by China are done to the United States. However China only receives 8 percent of the imports from the United States (CIA). This action taken would increase the prices of imports done and would decrease the prices of the US products exported. This therefore would have a direct effect on the consuming of Chinese products. The Chinese products would now be more expensive and the people would prefer using the US made products rather than the Chinese products.7 In my opinion the goods exported by China to the United States are so large in quantity that if they are stopped the economy of China would suffer. Similarly China to devalue its currency buys US debts. This helps China in creating a self created trade deficit and would further help them to devalue its currency. Thus this shows that China cannot break the bilateral relationship between it and the United States. 8 China is facing a severe crisis of rising inflation. In the month of February, Consumer prices increased by 8.7%, as compared to the previous price levels. This is observed to be the quickest increase in past twelve years. The policy makers however are fairly conscious about this issue of rising prices. The increasing inflation is pressurizing the government and policy maker to overcome this situation at their earliest. And they indeed, are trying to resolve it but the actual fact is that they are getting bad advices from the so-called experts who have been meditating on this concern. China Development Forum (CDF) has been working as a prominent area for free and impartial policy discussions since 2000. 9 The basic agreement at the meeting stated that China must not react aggressively to its latest outburst of price increases. To support their argument they further clarified that the reason of increasing inflation is due to the import of food and energy supplies. The global rates of food and energy have been raised due to the increasing cost of global services.10 The conclusion carried out by CDF is further confirmed by a number of facts. If you separate food, China's inflation is clinging to only 1.6%. In the other way, out of 8.7% of annual inflation rate in China, 90% is credited to only food. Now if you separate energy too, the core percentage goes down to 1.1 percent. The experts concluded that if this situation of increasing prices will not be thought out carefully there is a danger of further increase in inflation by the passing time. In conclusion to these facts, the policy makers of China are restricted to stay away from a more tightening of worldwide stabilization procedures, like monetary policy.11 The cause of interest taken by US in the increasing rate of Chinese domestic inflation is due to the steps it has taken for China's monetary policy, which is facing continuous stress and troubles to settle down Chinese economy. The standard procedures to accomplish it would be an increase in domestic interest charges, along with/otherwise by allowing the currency to have more value against the dollar. Any of these steps could end up in a fall in official Chinese buying of US bond, therefore contributing to an increase in interest charges in the United States. On the contrary, in the earlier period the Chinese powers have exercised more quantitative ways to manage the rate of the economy - i.e. advising or commanding more or less lending by the banking zone. That way involves a lesser impact on the US market i.e. US interest rates would not be influenced much, this is the reason why spectators in the US have been paying close concentration to each progress and step taken by the Chinese monetary authorities. However it is certain that day by day and month by month it is getting even more necessary for the Chinese government to take more appropriate steps in order to control this situation. The steps they have taken are weak and there is a need to make more rapid and stronger procedures to solve this issue. Like every state the economy of America has a direct effect on the economy of the world. As America is one of the largest consumer, exporter and importer of goods it has a great significance for different countries. America not only is suffering a trade deficit in the recent years but it has also developed fears of a degrading economy in the future. The US debts are owned by many of the foreign countries and this poses a threat to the country. Similarly as America is currently one of the major importers of Chinese goods, it has a major role to play in the exports of China. Thus it can be said that the USA has a major role to play in stabilizing the economy of China as China's GDP is mostly dependent on its exports. If the USA suffers a downfall the economy of China would in the initial stages face a major blow. The export system of China would suffer a setback as 21% of the goods exported by China are sent to America. China would experience a crisis with its economy if America suffers through a recession but after the initial stages the economy of China would become stable. As according to different researches it is found that China is now exporting a large number of goods to the European Union than to America. And it is further found out that these exports are likely to increase in the following years. This shows that as time would go by the amount of exports done by China to other countries would be greater than that done to America. Thus China would suffer initial setbacks from an American recession but after the initial stages it would get back to the norms. Similarly it is also expected that if the export system of China fails, even then the government of China has such steps which would help in increasing their domestic demand for goods.12 In 2007 the trade deficit in the United States rose up to the level of US$295.8 billion. There is still found a large amount of trade imbalance between US and China and nowadays the US is keeping its pressure on China to revalue its fixed exchange rate.13 In the recent years the trade imbalance occurring between these countries has allowed China to have an edge over the United States.14 The flow of dollars by the United States has allowed to China to buy a large amount of government securities in the United States. Thus this has created a fear amongst the United States people as China can sell these securities in a moment and therefore can increase the over all interest rates in the United States. However if China takes some action like this then they would have to suffer a setback from the United States in the form of exporting cuts. Thus this trading relationship among both these countries is of immense importance to both as both of them are of importance to each other. However because of the problems these countries are facing nowadays it is expected that this trading relationship would end up.15 In my opinion the step taken by United States to decrease the value of its dollar can be a major blow to the exports of China. It would increase the prices of the commodities exported by China; hence the consumers in America would not prefer buying the Chinese products. This can prove to be major setback for the exports of China, however as China has also increased its export to other countries it is expected that they would get stable after the initial stages. The GDP of China would not be largely affected. Thus it can be said that the trading between these countries is nearly coming to a stop.16 Bibliography Weller, Christian. "The US Current Account Deficit." New Economy. 11. 4 (2004): 243-248. Weller, Christian, Josh Bivens, and Max Sawicky. "Macro Policy Lessons from the Recent Recession." Challenge. 47. 3 (2004): 42-72. "Section 3 - Global Insights - China - Faced with a Record US Trade Deficit with China Last Year, The National Association of Manufacturers Outlines Its Policy Initiatives and Action Plan for Improving US Competitiveness As It Sets Forth to Increase US Exports to China Three-Fold by 2008." Chemical Market Reporter. 267. 8 (2005): 18. McKinnon, R., and G. Schnabl. 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