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Twenty years ago, many people thought that the economic superiority of the United States would be obscured in Japan, while China’s economic backwater. How things have changed.
Since 1978, China’s increasingly liberalized economy, opening the country to foreign investors and aggressively pursuing economic growth. They paid off; while China remains relatively poor in general, coastal regions are increasingly rich as a result of globalization.
Only the production has been moved to the northeast, to the lower-cost South of the United States, so this is moving the United States (and the rest of the developed world) to lower-cost China. The abundance of cheap labor, China will enable manufacturers to reduce production costs, which translates into lower prices for consumers when they go to the store. This is one of the major causes of low inflation in the United States has enjoyed for the past two decades.
When the Chinese manufacturers to ship products to the United States to pay in dollars. They give their dollars to the Chinese government in exchange for the Chinese currency. The Chinese government will take away most of those dollars to buy US Treasury debt with them.
By doing this, the Chinese government has time and again been the largest owner of Treasury debt – the bonds issued by the federal government to cover the budget deficit. By investing so much money in government bonds, China has helped to reduce the interest rates the government must pay.
So for the past two decades, China’s growth in the US economy benefited from both lower inflation and lower interest rates. The question now is how long it will take these trends?
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Source by Sean M Ryan