Impact of President Hu’s trip to the U.S.

April 29, 2006

As a result of President Hu’s visit, the Chinese purchased $16.2 billion of American goods and made a number of commitments, specifically:

• 80 Boeing aircraft worth $4.6 billion,
• $1.5 billion worth of soya beans and soya oil,
• $1.7 billion of computer software,
• resume U.S. beef imports,
• require that all Chinese computers use legal software,
• shut plants making pirated CD’s and DVD’s,
• improve intellectual property rights enforcement.

What it Means:

These promises represent a 50% increase in exports from the U.S. to China, which currently stands at $41 billion. China is our 4th largest market for U.S. farm exports (after Canada, Japan, and Mexico). However, our imports from China total $243.5 billion. For that reason, the IMF reiterated the U.S. request for China to loosen its currency. It is thought that China’s lower currency gives it an unfair advantage over the rest of the world.

However, one thing to keep in mind is that most of China’s exports are from foreign owned companies that assemble their finished products using China’s low cost labor. Ma Kai, head of China's National Development and Reform Commission said that, for example, there are 49,00 U.S. firms that had operations in China for a total combined investment of $51 billion. Any currency reevaluation would make these firms’ products less competitive, as well.

Secondly, China’s membership in the WTO should protect it from the kind of unilateral trade sanctions that are currently being proposed by many U.S. legislators. Most importantly, China’s trade surplus is what allows it to purchase so many U.S. Treasuries. Since China buys so many Treasuries, this keeps mortgage interest rates low for American borrowers. Imposing sanctions would reduce China’s surplus, which would reduce their demand for Treasuries, which would raise interest rates and costs of everyday goods for U.S. consumers.

Hu's U.S. trip was part of an overall tour that included Saudi Arabia, Morocco, Nigeria and Kenya - all efforts to strengthen China’s relations with countries that product oil and raw materials that are important to China’s continued growth.

Action Steps:

Protect yourself from future higher interest rates and higher cost of goods. If you are planning on making purchases of Chinese goods (shoes, clothing), do so now, before the costs get higher. Otherwise, change your mortgage to a 15 or 30 year fixed, as the yields on Treasury notes will probably continue to go up.

Source: U.S. State Dept.