Why should Americans try to understand what is happening to the Chinese 
economy? Why would the average American citizen even consider what is happening on the other side of the world even an important subject for discussion? We hear a lot about this issue in the news and in the political debates. Most Americans probably really do not have an accurate understanding of how the Chinese economy has been transformed since 1975. Most people think of a communist country as a place where people have no opportunity for personal economic growth or no opportunity for professional growth in a domestic or international company.
The truth is that people in China do have the opportunity to work hard and prosper. Their economy has been growing by a significant rate for many years. It is true that people living in areas far removed from the major cities are still living in poverty, but young people are moving away from the countryside into the urban areas in significant numbers. According to an article posted by CNN on January 18, 2011, China expects 350 million people to move away from the rural areas and into the cities by 2030. This is more people than presently live in the United States. The Chinese economy will need to grow at a sufficient rate to produce jobs and urban housing for all of these people.
Just like people all over the world, Chinese families living in the cities face the issue of finding a place to live that meets all of their family’s needs. The Chinese real estate market has been stretched to meet the needs of families with increased income looking for better places to live. Since 1978, China has allowed private ownership of real estate. The real estate market has gone through several ups and downs, including a boom from 1992 to 1993 and again in 2000 to 2003. Since 2007, the Chinese government has initiated measures to keep the market from overheating too much. The most significant control measure is tightening up on the requirements that must be met to qualify for a loan to purchase a home or purchase commercial property.
Adding to the pressures the domestic real estate market in China is experiencing, the government opened up the opportunity for foreign investment in real estate in 1995. According to China Knowledge Online, foreign investment in real estate by 2006 amounted to 4.7% of the total private ownership of real estate in the country. Although this percentage does not seem too significant, think about the opportunity that exists if indeed 350 million people move into the cities in the next 18 years.
Chinese Ownership of U.S. National Debt
The part of the Chinese economy that gains the most news coverage in the United States is the level of U.S. national debt that is controlled by the Chinese government and Chinese banks. A New York Times article by David Barboza dated July 18, 2011 placed the Chinese holdings of U.S. debt at $1.5 Trillion. The total U.S. debt presently is around 14 trillion. If the Chinese holding is $1.5 Trillion, then approximately 11% the U.S. debt is controlled by the Chinese. Chinese holdings of U.S. debt are primarily U.S. Treasury Bonds. It is important to understand why China is purchasing U.S. Treasury Bonds. Since China’s economy is experience a boom from an expanding positive export ratio, huge amounts of currency is flowing into Chinese banks from all over the world. China has discovered that U.S. Treasury Bonds provide the highest possible levels of security and liquidity of any investment in the world. Despite the well publicized economic woes America is experiencing, the American Dollar still provides the best place for countries like China to invest their wealth. This scenario means that the Chinese may continue to purchase significant levels of U.S. Treasury Bonds for the foreseeable future.
Amid all of the discussion of China’s foreign financial holdings, and China’s real estate problems, one of America’s leading hedge-fund managers Jim Chanos believes China’s banks are in for real trouble. Jim Chanos made the following comment about the financial situation in China on October 11, 2011.
“The fact that people are even talking about the government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating,” Chanos, founder of New York-based hedge fund Kynikos Associates, said in an interview with Bloomberg Television’s Michael McKee today.
All of the world’s economies share an economic connection one way or the other. In the case of China and the United States, both countries are linked through a mutual need to maintain continued economic stability and growth. Until the United States is able to reduce the huge national debt that exists, there will be a need for countries like China to continue purchasing our national debt through financial instruments such as Treasury Bonds. China has an overwhelming need to sustain her economic growth to meet the needs of a burgeoning middle class. China needs the United States and other countries to continue purchasing her exports of manufactured goods. Finally, it is important not to vilify Chinese economic growth, but to look at the immeasurable economic opportunities that will exist in that country over the next 20 years.
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