How the Economy of China Affects the US Economy and the Dollar

China is the world’s third largest economy, surpassed only by the United States and Europe. With a growth rate averaging around ten percent per year since the 1980’s, China is catching up real fast. As China continues to grow as a major player in the global economy, it will also have an increasing influence on the world currency markets, especially in light of China’s tendency to pursue policies designed to artificially undervalue their own currency.

Despite white hot economic growth, China remains poor by Western standards, with the average citizen still making less than $10,000 per year compared to around $50,000 per year for the average American and European. This gives China a temporary advantage in cheap labor, but one that is expected to fade as the country’s living standards rise. China depends heavily upon exports, especially to the United States, so the economy of the U.S. and China are closely entwined.

For a long time the world community has tolerated China’s currency manipulations because it was rising out of poverty. However, now that China is reaching or surpassing most of the world’s economies pressure is building on the Chinese to let their currency rise to match its true market value. If China wants to be in the big leagues then it has to start playing by the big league rules, and their kind of blatant currency manipulation is simply unacceptable by advanced economies.

How China’s Economy Will Affect the Forex Market

China’s economic policies will have a major impact on the Forex market. China holds more bonds and notes in U.S. debt than any other nation, so whatever happens to China in terms of its continued economic growth (or lack thereof) and fluctuations in currency will have a direct impact on the value of the dollar and other currencies linked to the U.S. and Chinese economies. Such factors as whether China voluntarily reforms its currency policies or is forced to do so by such actions as tariffs and other sanctions will determine whether the effects will be positive or negative for foreign exchange markets. When formulating your trading strategies, it would be wise to consider how China will affect your Forex strategies both short and long term, as China’s effect on the U.S. economy and the dollar will be a factor which everyone in the market will need to consider.