Just for fun, I asked my Facebook friends to guess the ratio of Chinese exports to China’s gross domestic product (GDP). They are all avid consumers of news.
The average guess put China’s US exports at 30% of GDP, with a standard deviation of 22% (see chart). The actual number is less than 3%.
This admittedly unscientific sample overestimated China’s economic exposure to the United States, that is, by an order of magnitude. My friends’ guesses are displayed in this histogram:
China’s exports are just 18% of GDP, half of the 2008 proportion, and exports to the US at a bit under US$400 billion a year comprise just 16% of total exports. Meanwhile, exports to the US have fallen from a peak of 22% of total to about 16% at present.
In 2018, that is before Washington raised tariffs on many Chinese imports, Chinese exports to the US reached a $500 billion annual rate, equal to a startling one-quarter of US manufacturing GDP.
The subsequent drop in China’s exports to the US had a negligible impact on China’s GDP growth.
During the past three years, Washington has tried to put pressure on the Chinese economy through tariffs, technology export controls, investment restrictions, as well as the threat of de-listing Chinese companies from US exchanges and denying Chinese banks access to US dollar financial markets.
Most of these measures have had negligible effects on China and some have had adverse effects on the US. The Wall Street Journal editors warned in a July 8 editorial that financial sanctions might endanger the US dollar’s status as the world’s leading reserve currency:
“The bigger risk from such economic warfare is to the US. Washington derives enormous influence from the free convertibility of the greenback, which allows governments, institutions and individuals to use the dollar as a global reserve currency.”
Although decoupling from China has become something of a Shibboleth in Washington since the Covid-19 pandemic, the facts suggest that China is gradually decoupling from the West. Together, China and neighboring Southeast Asia have a population of 2.1 billion, nearly seven times that of the US, and 60% of Asian trade remains within Asia.
Asian dependence on US technology, meanwhile, is diminishing. The US invented the microchip, but it is now possible to produce the world’s most advanced chips with a combination of European, Japanese and Chinese equipment.
Although China still depends on the US, Taiwan and South Korea for chip imports, it is devoting massive resources to build up its own semiconductor capability. It has a number of ways to work around the restrictions that the US imposed on chip sales to Huawei and other Chinese firms from foreign foundries that use American equipment.
Japan and South Korean chipmakers and equipment producers may be the chief beneficiaries of China’s drive for semiconductor self-sufficiency.
According to the American brokerage Jeffries, expelling Chinese companies from American exchanges could send $557 billion to Hong Kong as investors buy re-listed stock in the financial hub. More than $23 billion has already flowed into Hong Kong since the US raised the prospect of de-listing Chinese companies in May.
The Hong Kong dollar has traded at the top of its narrow band against the US dollar. China’s CSI 300 equity index, meanwhile, has risen 20% during 2020 to date, while the S&P 500 Index is flat.
China’s relative success in managing the Covid-19 pandemic has produced a much faster economic recovery than in any Western country. According to a Bloomberg survey of forecasters, China will grow by 6% from the fourth quarter of 2019 to the fourth quarter of 2020, while the US will shrink by 5%. The forecast for Western Europe calls for an 8% decline.
The divergence in growth is mostly due to comparative success in suppressing the Covid-19 pandemic. China reports a total of just 85,000 cases versus 3.25 million in the US to date. Even if China’s data were understated by a factor of ten (which it is surely not), the discrepancy still would be enormous.
China has settled into 6% GDP growth, lower than the double-digit growth of the past driven by rapid migration to cities from the countryside. Most of the growth now comes from rising household consumption rather than exports.
China’s equity market reflects the increasing importance of consumption. The CSI 300 Index has gained 240% since January 1, 2020, while its consumer durables sub-index has risen by 270%, the best sectoral performer.
In the long term, the most important difference between the US and Chinese economies is that China announced a $2.2 trillion, five-year investment program in advanced technology at the National People’s Congress that met in the last week of May, while the US has no centralized effort to support technological innovation.
The US spends just 0.6% of GDP on federal support for basic research, versus 1.4% during the Ronald Reagan administration and 2.1% at the peak of spending on the John Kennedy moonshot program in 1963.
To the Chinese officials of 1973 who received Richard Nixon to open diplomatic relations, the US was the wonder of the world, a never-ending source of scientific miracles that would transform every facet of human existence.
Now China sees the US as a declining power and believes that the dominant position of the Middle Kingdom will be restored, after a regrettable interruption of a couple of centuries due to the West’s Industrial Revolution.
Despite its best efforts of the past three years, the US continued to lose ground against China and the Covid-19 pandemic has accelerated this trend.
As I argue in my book You Will Be Assimilated: China’s Plan to Sino-Form the World, if the US fails to rebuild its engine of innovation and seize the technological high ground, it will join Great Britain and Russia on the list of former superpowers.