SOME THOUGHTS ON CHINA AND THE US ECONOMY
Frederic P. Slade, CFA, Director, Investments, Pentegra Retirement Services
Background
China has evolved from a closed-off society to one of the world largest economies and trading
partners. What are some of the key implications of China’s rise in prominence for the US
economy at present and going forward?
Beginning with economic and market reforms introduced in 1979, the Chinese economy has
posted some of the following statistics:1
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China’s Gross Domestic Product (GDP) annual growth has been 10% per year through
2013, although the growth has slowed to around 7% recently (still very high compared to
other countries).
China’s estimated GDP in US dollars increased to $9.4 trillion in 2012 (56% of United States
GDP)
China has become the world’s second largest economy, ahead of Japan and behind
only the United States.
Trade Deficits
China has also become one the United States’ largest trading partners, accounting for about
$630 billion, or about 15% of total US trade activity in 2013 (imports plus exports). China has also
become the world’s biggest merchandise exporter and the world’s largest manufacturer.2
Although China has been growing at an impressive rate and presents a huge potential
consumer market for US goods and services (population of 1.4 billion), China has continued to
run trade deficits with the US (i.e. China has been exporting more to the US than they have been
importing from the US).
What are some of the main reasons behind these trade deficits?

Although China has the world’s largest population, its income per capita lags behind
other countries. In 2013, China’s per capita GDP was $6,960, or 13.1% of United States
per capita GDP. China, therefore, has less income to spend per person.

The Chinese currency, the Renminbi (RMB) is considered to be undervalued since it is
not allowed to float as is the case with most other currencies. As a result, the Chinese
currency has less buying power in US dollar terms. Conversely, Chinese goods and
services have become cheaper for the rest of the world. A floating currency would
help bring the US trade deficit with China back into balance.

Among the world’s largest economies, China has the world’s highest savings rate as
a percent of their GDP, while China’s private consumption as a share of GDP is the
lowest among the world’s largest economies. This creates less spending on other
countries’ goods, including the US. China has moved to encourage more
consumption by its citizens through economic and social policy.

Although progress has been made, trade barriers still exist for US goods being
exported to the United States, including Chinese government subsidies and the need
for more protection of intellectual property rights.
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There is and will be competition from “home grown” companies. An example is the
Chinese internet and retail giant Alibaba Group, which is soon expected to have the
largest IPO ever by a technology company.
Investing in China’s Stock Markets
While it has become easier for US investors to invest in the Chinese markets, China remains an
emerging market (on par with Brazil, India and Russia), with greater volatility, regulatory control
and investor uncertainty than developed markets such as the US and Japan. Institutional
allocations to overall emerging market stocks have been relatively low, about 5%. Chinese
stocks can be accessed through local shares, companies listed on US stock exchanges and
Exchange Traded Funds (ETFs).
Summary
Although there are a number of trade, market, economic and social issues associated with
China and its economy, China will continue to be a growing and major force for the United
States, the world economy and global capital markets. Stay tuned.
Notes
1. Wayne M. Morrison, “China’s Economic Rise: History, Trends, Challenges, and Implications for
the United States”, Congressional Research Service, February 3, 2014.
2. United States Census Bureau, Top Trading Partners - December 2013.
NOTE: Information presented herein is for discussion and illustrative purposes only and is not a
recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a
guarantee of future results.
About Frederic Slade
Fred Slade has over 25 years of experience in the investment management and retirement
services industries. He is Director, Investments for Pentegra Retirement Services, a leading
provider of retirement services to financial institutions and organizations nationwide, founded by
the Federal Home Loan Bank System in 1943. Mr. Slade manages over $1 billion in internal bond
portfolios and provides analytics and strategy for Pentegra’s Defined Benefit and Defined
Contribution Plans. Mr. Slade holds a Ph.D. in Economics from University of Pennsylvania and a
CFA, and has presented at a number of seminars and conferences.
NOTE: Information presented herein is for discussion and illustrative purposes only and is not a
recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a
guarantee of future results.