Sichuan Earthquake Silver Lining

If the U.S. economy is slipping into a recession that will ripple out into the global economy, then that ripple will stop at China's shore. China's demand will help absorb the shock of our solvency crisis.
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As the Chinese recover from the aftermath of the devastating earthquake, it's worth remembering that they can't rebuild Sichuan province alone. They need America's help.

In the months to come, China's central and provincial governments will spend billions to remake hospitals, communication and power networks, roads and infrastructure, dams and water-treatment facilities, factories, schools and houses.

But many of the goods and services needed to rebuild aren't produced in China. That's not because of any damage that the earthquake may have caused; Sichuan accounts for less than 4% of China's GDP. Rather, there's a fundamental deficiency in China's industrial capability.

In most industries, China lags decades behind the U.S., with factories that don't meet modern quality standards. That's a problem if you want to make a Barbie doll, but it's an even bigger problem if you want to make a safe nuclear power plant. Or rebuild a province.

U.S. exports to China will no doubt increase as a result of the earthquake, but China buying American is nothing new. Indeed, China is our third-largest export market behind Canada and Mexico. Few politicians talk about it, but 406 out of 435 Congressional districts have seen triple-digit export growth to China from 2000-2007. Those exports have created jobs and built value in local communities.

In fact, U.S. exports to China are growing five times faster than any other export market. This is less a function of the falling dollar and more of rising Chinese demand for U.S. products. Put simply, they need what we make -- from chemicals and components to turbines and telecommunications, from drugs and medical devices to sewage and sanitation equipment. If a product requires modern technology and precise engineering, chances are, China needs it. Not to mention all the services and after-care required for set up and maintenance.

The broader lesson here applies to our ailing economy. If the International Monetary Fund is right and the U.S. economy is slipping into a recession that will ripple out into the global economy, then that ripple will stop at China's shore. China's demand will help absorb the shock of our solvency crisis.

To understand why, we need to compare balance sheets. China is essentially America's economic alter ego. American households have a negative savings rate. Chinese households have a formidable 80% savings rate. Our treasury is trillions in debt. China's treasury has trillions in retained earnings. We're leveraged to the gills. China is swimming in black ink.

China's behemoth currency reserves and strong demand were why China was able to weather another financial crisis -- the currency crisis that hit Southeast Asia in the 1990s. China was one of the only regional economies not to collapse. Indeed, its savings rate and high demand helped rescue its neighbors.

More than a decade later, China has accumulated even greater savings. There's enough money under China's mattress to midwife the largest middle class on the planet. Which means China will keep buying more and more from America.

China couldn't ask for a better time to buy American. The falling value of the dollar -- coupled with the steep appreciation in China's yuan -- is nothing short of a gale force tailwind for U.S. exporters. The Sichuan earthquake only adds urgency to China's already powerful demand.

So, in dealing with this catastrophe, America and China's interests are aligned. By exporting American goods and services, we help China in a desperate time of need -- while creating jobs and building up our national savings account in the process.

Originally published in the Wall Street Journal.

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