Why China Affects Your Mortgage Payment
Every economist will tell you that China's surging economic growth has a direct effect on U.S. consumers. But how, exactly? Sure, cheap Chinese imports help lower our shopping bills. But Communist Party ministers in Beijing also touch the average American through more abstruse things, like what they do with foreign-exchange reserves and currency valuations.
To help explain how, Deputy Business Editor Rick Newman spoke with Jim Barth, a senior finance fellow at the Milken Institute in Los Angeles. Barth, who also teaches at Auburn University, recently led an international team that advised China's central bank on industry reform. He worked for the Reagan and first Bush administrations as a senior government economist and has been a visiting scholar at a number of agencies, including the World Bank.
So let's talk about why American consumers should care about what happens in China.
For starters, China accounts for one sixth of the world's population, and it's the fourth-largest economy in the world in terms of gross domestic product. What happens in China can affect the U.S. economy directly. That was not the case 25 years ago.
They're a huge exporter now.
That's right. U.S. consumers benefit directly from goods imported from China because they're cheaper. Wages are much lower in China than in the U.S. They have a lot of people, which leads to low wages. A lot of the goods sold through Wal-Mart come from China. Consumers don't mind that. But some U.S. firms do tend to lay off people, and at the same time some are less profitable when they have to compete against cheaper Chinese goods. They tend to complain, and that's where the political tension comes from. There are gainers and losers.
What are some examples of where that's happening now?
Textiles. It doesn't take a lot of skill to make a T-shirt anymore. And toys. About 70 percent of all toys are made in China. Some higher-skilled products are coming, too. Like electrical and power generation equipment. Perhaps automobiles soon. Keep in mind: It's not bad to lose jobs to China–if they're low-skill, low-paying jobs. We don't want young people to go into low-skill industries that may not be competitive in a global economy. Those don't require a lot of education. It's the high-skill and high-paying jobs we don't want to lose.
So losing low-skill jobs to China keeps the pressure on in the United States to continually freshen our skill base?
It's sort of like creative destruction. We want to depend more on brainpower than using low-skilled people for our economic growth.
Cheap imports benefit the U.S. economy overall, right?
Yes. They lower inflation overall in the U.S.
All the money Americans spend on Chinese products–where does it go?
The money goes to firms in China. They get it in dollars. Then they have to go to the bank to convert it to the Chinese currency, the yuan or RMB, so they can pay their employees, buy local goods. So the banks accumulate dollars. To convert them to yuan, they must go to the central bank, the People's Bank of China.
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