America and China: A Necessary Economic Relationship

Mark Siara - Mon 03 Dec, 2007

Two reports on the BBC website recently highlight the growing influence and importance of China to the rest of the world. Adam Blenfords report China in Africa: Developing Ties focuses on the mutually beneficial relationship between the worlds most populous country and the planets second largest continent. Africa sells China natural resources oil, copper and iron and China provides Africa with infrastructure roads, power and telecoms. Trade between the two parties is up by a factor of ten in over a decade and still climbing. Its a real win-win and all without the involvement of those pesky Americans....

Two reports on the BBC website recently highlight the growing influence and importance of China to the rest of the world. Adam Blenford’s report China in Africa: Developing Ties focuses on the mutually beneficial relationship between the world’s most populous country and the planet’s second largest continent. Africa sells China natural resources – oil, copper and iron – and China provides Africa with infrastructure – roads, power and telecoms. Trade between the two parties is up by a factor of ten in over a decade and still climbing. It’s a real win-win and all without the involvement of those pesky Americans.

There have been disapproving calls from the West regarding the Chinese laissez-faire approach. The US and Europe want the Chinese to stop trading with some of the more disagreeable African governments. Concerns have been raised about human rights and corruption. The problem with this Western criticism has always been one of credibility – British and French colonialism of the past and more recent American meddling in the continent mean they haven’t got a leg to stand on. And that’s without even mentioning Zimbabwe. The words pot, kettle and black spring to mind.

Clearly the West is worried that China is going to “bagsy” all the best deals when it comes to African resources. Things are becoming edgy in the global schoolyard with the school bully and his gang in danger of being usurped by the Eastern newcomer. Fortunately neither side seems to want a full-on fight – at the moment. However, one of the playground crew – the slightly annoying one that doesn’t really fit in - has chosen to ingratiate himself with the new kid. Yes, France has announced a €20 billion deal to sell aircraft and nuclear power plants to China. Sarkozy wins China 20bn Euro deal.

You can’t begrudge Sarkozy his moment of glory; after all the agreement is a welcome break from headlines about strikes and riots in Paris. The good news will be welcomed in Europe too - €10 billion of the deal is for Airbus aircraft, which seems to put the sword to the argument that EADS (Airbus’ parent company) wouldn’t be able to compete with Boeing’s dollar-priced Dreamliner et al.

At first glance it may seem that China doesn’t need America; it can buy what it needs from elsewhere. Resources from Africa, plant and equipment from Europe and then there’s Japan – its exports to China are up by over a third since 2003. If true, this is bad news for the US which looks likely to head into a consumer-led recession sometime next year. There are hopes that the steadily weakening dollar would boost America’s export markets to prop up the ailing economy, but if China buys elsewhere, even that support could be undermined.

So, are the two economies decoupled to such an extent that China can withstand any major slowdown in the US? There are a lot of very frightened fund managers out there who want you to think this is the case, but don’t believe the hype. It’s simply not true.

Firstly, over 20% of China’s exports head into the United States, so any cutting back by the debt-laden American consumer is going to have a significant impact. Factoring in a continually weakening dollar, making it more expensive for the US to import, only compounds the misery. Add in the increasing threat of political interference in the shape of protectionist tariffs and China looks vulnerable. For example, with around one third of China’s GDP being export driven, a reduction in exports to the US by, say, one half would take 3.3% out of growth.

Then there’s the small matter of domestic inflation, currently running at around 6.5%, according to official figures, with upside pressure from food and fuel. This implies the Chinese government will have to raise interest rates again, putting more pressure on the Yuan’s peg with the dollar. If at any point China decides that printing more Yuan is not the way forward, the dollar will fall further and the Chinese economy will lose on two fronts. As already mentioned, exports to the US will take an additional hit but there’s also the small matter of some $1.4 trillion currently held in China. A weakening dollar would further devalue those assets, making it more difficult for Beijing to spend its way out of trouble in the event of a downturn.

Of course, it can be argued that some weakening in the Chinese economy is desirable from an inflation point of view, reducing the pressure on the Yuan-Dollar exchange rate. Additionally, the effect of the Olympics next year could provide a domestic and tourism boost which will overcome any export-led shortfall. Then there are all those long-term infrastructure projects which aren’t going to stop overnight.

On the face of it China and the US make strange bedfellows with significant cultural, political and even economic differences – although ostensibly free market, China is not adverse to direct interference; witness Beijing’s recently imposed lending freeze in an effort to quell the bubble in its stock market. One thing they do agree on is their mutual survival – America and China need each other. An odd couple maybe, but decouple? Now that would be very odd indeed. 

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