Why a Global Recession Doesn't Hurt China (Much)

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Many economists have argued that China would be the most affected by a global economic slowdown because it is a net exporter, and in fact, one of the largest exporters in the world. Even as consumers are slowing down on their purchases and China is exporting fewer products to the world, there are some inherent benefits that China reaps when the global economy turns sour.

The trade surplus

For decades, China has remained a leading exporter and minimalist importer, which has produced very favorable international trading environments for its products. With a decade long trade surplus, China has built up an incredible amount of foreign currency and holdings to ensure its standing as an economic leader. To date, China holds nearly 1.7 trillion US dollars in its foreign holdings, which is enough to keep the country is good fiscal condition for quite some time.

No need for financing

The credit crunch barely even phased the Chinese economy on the production side when compared to the pressure it put on its exports. With more and more cash pouring into the Chinese mainland by the day, it has little need for outside financing to cover its future investments. As much of the Chinese economy is controlled by the state, China has the ability to tap its huge foreign reserves to make any investments. Even when credit is tight, China has enough capital to make the investments it needs for the long haul without dealing with the broken financial industry.

China’s cheap labor

Even as recession is slowing down employment and dropping wages around the world, very few nations are able to compete with inexpensive Chinese labor. In a study that was completed in 2002, it was found that the average Chinese manufacturing worker earns just $.57 per hour in compensation. Compare this to the actual figure of $29 per hour that union workers in Big Three auto manufacturing plants earn, and it’s easy to see how China has a competitive advantage over many industries. Though China does not enjoy the same amount of productivity per worker due to limited resources and capital spending on manufacturing centers, its ability to leverage workers and spend less on expensive improvements keep Chinese products cheap and easily exportable.

A net energy importer

As discussed previously, Chinese factories are less productive and much more energy demanding than more efficient factories in developed nations. As such, China must import billions of dollars worth of energy each and every year to keep its factories in order. When oil was $147 a barrel, this put a damper on Chinese growth, but with energy cheaper across the board, China has a much better economic outlook. Its investments in foreign oil companies help offset the costs of importing huge amounts of energy each year.

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