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China Muscles In Where did all this global capital come from, and why did so much of it end up in the U.S. housing market? The answer begins in China at the turn of the millennium, just as the new Chinese economy was bursting onto the global stage. The catalyst for China's stunning economic ascent was its entry into the World Trade Organization (WTO). Membership in the international organization that sets the rule for trade among its members conferred economic advantages of lowering barriers and opening doors. It also signaled that a country mattered that it had a seat at the table of global commerce. The Chinese leadership had long lobbied to join the WTO, and it finally happened in 2001. Entry into the WTO significantly opened up global markets for China's goods. For increasingly footloose global manufacturers, it meant new or expanded opportunities to hire hundreds of millions of Chinese workers on better terms than could be obtained anywhere else on the planet. Combined with a fixed and increasingly undervalued currency, the yuan, this made China the lowest-cost location to produce goods for the rest of the world. China's manufacturers received another big lift in 2005, when the 20-year-old multifiber trade agreement expired. This trade treaty had limited the exports of textiles and other garments from developing economies such as China to the United States and other developed economies. With its expiration, shipments from low-cost Chinese producers surged. In the mid-1990s, China was a small player in the global economy, but within ten years, it was producing more than a tenth of the globe's manufactured goods. China's gains came at the expense of manufacturers everywhere else: Apparel, textile, and furniture producers in the Southeastern United States were hit hard, as were lower-end producers in Mexico and Central America. Even Italian producers of fine consumer goods struggled. Because manufacturing is so important to most global economies, China's rapid grab of global market share caused wrenching adjustments in many places around the world. Outside of China itself, the principal beneficiaries of the country's ascent were American consumers. No other nation produced more items for U.S. store shelves than China; by 2008, more than a tenth of America's imported consumer goods were crossing the Pacific and through the ports of Los Angeles or Seattle. Big U.S. retailers most notably Wal-Mart showed themselves extraordinarily adept at setting up efficient supply chains: from Chinese factories, to container ships, to U.S. shopping malls or Internet catalog sites. Prices plunged. The cost of Chinese-made products from sweaters to computers plunged by 20% during the first half of the decade, enabling U.S. retailers to actually lower the prices on the goods they sold to consumers. Inflation had given way to deflation outright declining prices in most stores. These bargains were too good to pass up. As consumers scarfed up the deals, the nation's import bill and trade deficit ballooned. The red ink in U.S. trade with China was $50 billion when 2000 began; by 2008, it totaled a whopping $250 billion. Trade with China alone now accounts for almost a third of the total U.S. trade imbalance. The Chinese were initially unsure of what to do with their new riches. Investment had been anathema under Mao, and few mainland residents, even among the government elite, had any idea how to go about it. The easiest and most obvious place to put U.S. dollars was in U.S. Treasury bonds. They were safe and liquid, and didn't require much financial sophistication to understand. The Chinese were similar to any young person earning a salary for the first time; they wanted to make sure they had cash socked away for a rainy day. In a sense, U.S. Treasury bonds became China's certificates of deposit.
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