The Impact of China on the US Economy

I spent last week in Washington DC at CUNA’s Government Affairs Conference.  I always enjoy going there as I love US History.  However, sadly, I did not go to any museum or monument because of work.  This is your CUSO hard at work.

The day before we landed back in South Dakota, my oldest son returned from a month long trip to China.  This was his third trip to that country.  Since I am always interested in economics, I wanted to get his take on the status of the Chinese economy since I hear reports of a slowdown.  I found his take on the situation there interesting.

He showed me a shopping center that was full of a large variety of shops when he was there last year.  Now, there is only a Wal-Mart and a few clothing stores.  He said it was like a bomb went off in the place.

He has a friend over there whose mother lost her job at a retail store in a mall after working for years at the same place.  She has not been able to find another position yet.

On Sunday evening, the People’s bank of China reset the midpoint of the renminbi’s trading range to 6.5452 per US dollar.  This is the lowest fixing in nearly a month.  The Chinese have been devaluing their currency in an attempt to stimulate the export sector of their economy.  It is interesting that the drop came just days after China signed a pledge at the G-20 meeting to not resort to currency wars.  Then just a few days later, they devalue their currency by a larger than normal amount.

Additionally, the Chinese central bank cut its reserve requirement ratio by 0.5%.  Dropping the reserve requirement is a monetary stimulus tool aimed to get money back out into the economy and out of the bank vaults.

China does not control our economy but it is a huge influence on the overall world economy.  Most of the economic growth in the past decade has come from the BRICS-Brazil, Russia, India, China, and South Africa.  Now, most of these countries are languishing.  Their lack of economic growth hurts several areas in our economy.  One of the largest is agriculture.

Every devaluation of a currency compared to the US makes our exports more expensive.  This has a huge impact on our producers in the US.  If you have any doubt about this, ask any wheat farmer who lived through the Russian grain embargo.  The factors were different then, but it still caused the demand for US grain to drop sharply.

Meanwhile, we will still see moves in countries like China to prop up their economy.  Foreign reserves continue to flow from that country at record paces.  It would not surprise me to have a sharp decline of as much as 20% in the yuan in one day as an option to help stop the bleeding.  Each sharp drop there can send a ripple impact over here, especially in our ag sector.