Impact of the Chinese Economy on the U.S. Economy in 2020

In the first quarter of 2020, the People's Republic of China recorded their first contraction in gross domestic product (GDP) since official records began in 1992. The National Bureau of Statistics of China reported a year-over-year GDP decline of 6.8% for the quarter. However, bolstered by its efforts to contain the COVID-19 pandemic and reopen its factories, China experienced a GDP rebound, with the government reporting a 3.2% GDP increase in the second quarter of 2020. This was followed by a 4.9% GDP increase in the third quarter.

What impact has China's swift ability to restart its economic engines had on the U.S. economy and the global economy? To answer these questions, you need to first assess the economic position of China within the world economy.

The Size of China's Economy

The International Monetary Fund (IMF) predicts China will be the only major economy to grow in 2020, with projected real GDP growth of about 1.9% for the year. This is in stark contrast to the U.S. economy, which is expected to shrink by 4.3% in 2020. The IMF expects European nations to post negative growth numbers in 2020 as well, with the United Kingdom estimated to contract by 9.8%, Germany by 6%, and France by 9.8%.

The sheer size of China's economy has had a lot to do with its ability to regain positive momentum. China, the most populous country in the world, had the second-largest economy, ranked below the United States with a GDP of $14.3 trillion in 2019. However, this high GDP did not necessarily indicate the wealth of the country. The country's GDP per capita was only $16,785 as of 2019, compared to the U.S., which had a per capita GDP of $65,118.

Over the decades, many global manufacturing companies have located their manufacturing units in China, attracted by the nation's low labor costs and cheap supply materials. This allowed companies to produce goods cheaply, and it explains why many of the products we use in our daily lives are made in China.

Relationship With the U.S. Economy

China is the third-largest trading partner (the first and second being Canada and Mexico, respectively) of the United States, with $558.1 billion in total goods traded in 2019. Of that amount, export goods accounted for $106.4 billion and import goods were $451.7 billion, bringing the U.S. trade deficit with China to $345.3 billion.

This deficit is financed partly by capital flows from China. China holds more U.S. Treasury securities than any other foreign country except Japan. According to the Treasury, China owns $1.06 trillion in U.S. debt securities as of Sept. 2020.

All of these statistics show the importance of the Chinese economy and why any developments in China, be they negative or positive, can influence the world’s largest economy, the United States.

The Chinese Slowdown

Starting in 2010, China's economic growth rate began to gradually decline. The GDP growth rate dropped from 9.6% in 2011 to 7.4% in 2014 (see graph below). The rate continued its decline to 5.95% in 2019 and 2.3% in 2020. The 2020 GDP growth is impacted by the Coronavirus pandemic.

Economists have raised concerns that this slowdown in the Chinese economy would have negative impacts on the markets that are closely related to this economy, such as the United States.

Effect on Unemployment Rates

U.S. companies that generate an important portion of their revenues from China are likely to be negatively affected by lower domestic demand in China. This is bad news for both shareholders and employees of such companies. When cost-cutting is necessary to remain profitable, layoffs are usually one of the first options to consider, which increases the unemployment rate.

China's Silver Lining in 2020

China's role as "the world's factory" has been a key factor in its ability to quickly rebound in 2020. The nation is well-known for its abundance of lower-wage workers, a strong network of suppliers, lower tax rates that keep the cost of production low, competitive currency practices, and government support that reduces regulatory hurdles.

While the rest of the world struggled to regain its economic footing, China's ability to reopen its factories and post impressive GDP numbers in the second and third quarters of 2020 proved that the nation's economy was still growing.

If anything, the COVID-19 pandemic has cemented China's importance in the global supply chain. Much of China's 2020 growth has been attributed to its factories meeting the world's demand for personal protective equipment (PPE), medical equipment, electronics (such as laptops), and other items that have been in short supply as the rest of the world shuttered its factories while complying with mandatory stay-at-home orders.

The Bottom Line

China, with its giant economy, has a huge influence on world economies. In 2020, the nation proved its resilience and was able to reopen its factories relatively early in the year, supplying the U.S. and other global economies with much-needed exports.

However, one of the biggest long-term risks to China's economy could come in the form of economic decoupling. Throughout the year, tensions between the United States and China have escalated over a number of issues, including Hong Kong, the prolonged trade war, and increased tech rivalry. An economic decoupling could mean a reduction or severance of ties between the world's two largest economies. China, for its part, has taken steps to reduce its dependence on the U.S. economy, building partnerships with other nations through its One Belt One Road (OBOR) initiatives.