The news regarding the Chinese economy over the past few weeks has been awful, to put it mildly.
Growth in the country has fallen from its usual annual pace of 8 percent to close to 3 percent. Real estate companies are collapsing after a decade of overbuilding. Frustrated by long coronavirus lockdowns and a loss of confidence in government, Chinese citizens have not been able to get out of the country’s pandemic-era malaise.
If the world’s second largest economy is faltering hard, what does that mean for the world’s largest economy?
Short answer: For now, the consequences for the United States may be minor, given China’s limited role as a customer for American goods and the simple connections between the two countries’ financial systems.
In a note published Thursday, Wells Fargo simulation A “hard landing” scenario for China, in which output over the next three years will be 12.5% lower than previous growth rates – similar to the effect of the 1989-1991 recession. Even under these conditions, the US economy will contract. Just 0.1% inflation-adjusted growth in 2024, and 0.2% in 2025.
But that could change if China’s current fragility deepens into a collapse that drags down an already slowing global economy.
“It doesn’t necessarily help matters, but I don’t think it’s a major factor in determining the outlook for the next six months,” Neil Shearing, chief economist at Capital Economics Group, an analysis and advisory firm, said in a report. Recent webinar. “Unless the outlook for China becomes much worse.”
A potential balm for inflation, but a threat to plants.
When considering the economic relationship between the two countries, it is important to realize that the United States has played some role in China’s problems.
The United States has weathered a consumption boom during the pandemic that drew $536.8 billion in imports from China in 2022. This year, as home offices and patios fill up with furniture and electronics, Americans are spending their money on cruises and Taylor cruises. Swift tickets instead. That reduces demand for goods from Chinese factories — which had already been weakened by a slew of tariffs initiated by former President Donald J. Trump and largely maintained by the Biden administration.
For many years, China’s leaders have said they want to rely more on the country’s families to drive economic growth. But they have taken few steps to support domestic consumption, such as subsidizing safety net programmes, which would persuade residents to spend more of the money they now save for emergencies.
This is why some worry that China may again resort to encouraging exports to boost growth. Such a strategy might work because China’s currency, the renminbi, is so weak against the dollar, and tariffs on most items can be evaded by bundling Chinese parts in other countries — like Vietnam and Mexico.
Increased exports would have offsetting effects. This could lower consumer prices, which – along with lower Chinese demand for commodities such as gasoline and iron ore – should help reduce US inflation. At the same time, it may counteract efforts to revive American manufacturing, raising the political temperature as the presidential election approaches.
“I worry that China’s export-driven recovery conflicts with a world reluctant to become more reliant on China for manufacturing, and that becomes a source of tension,” said Brad Setser, a senior fellow at the Council on Sustainable Development. Foreign affairs.
And what about the flow of goods the other way, from the US to China? It’s not a huge size – China It represents only 7.5 percent of US exports in 2022. American companies have long sought to further develop the Chinese market, especially for agricultural products such as pork and rice, but the success has been disappointing. And in 2018, the Trump administration negotiated an agreement under which China would buy billions of dollars more in produce from American farmers.
These goals were never achieved. And as appetite fades in China, this may never happen. This may mean lower food prices globally, but farmers will be affected.
“If demand for corn and soybeans is going up, that’s good for everyone who produces corn and soybeans around the world,” said Roger Cryan, chief economist for the American Farm Bureaus Association. “It’s nothing to worry about in the future.”
Isolation for American institutions and investors.
So much for general trade dynamics. But the US economy is made up of millions of companies that have certain concerns, some of which may have more concern about the Chinese economy faltering.
For example, Tesla has had inroads in the Chinese market, but it has been very successful Sales there have plummeted In recent months in the face of fierce competition from domestic brands with less expensive models. Apple generates about 20% of its revenue in China, which could also suffer when residents choose cheaper products.
US banks that do business globally have noticed slowing growth; Jane Fraser, CEO of Citigroup, said in the company’s second-quarter earnings conference call that China was the company’s “biggest disappointment”.
Chinese tourists also funnel money into American cities when they visit, which they may not do as often in the future. Glenn Vogel, CEO of Booking Holdings – which includes travel sites such as booking.com And Priceline — said on its earnings call that their outbound business from China has been weak.
“I don’t see a recovery in China for us for some time, maybe for a long time,” Vogel said.
However, these effects are likely to be muted. Even if the economic picture darkens, the US and Chinese banking systems are separated enough to isolate US institutions and investors, except for the few who may have invested in real estate developers such as Evergrande or Country Garden.
“There are no realistic channels of financial transmission from China to the United States,” said Dr. Setser. He noted that while China’s central bank may refrain from buying US Treasuries, any impact on the overall market could be contained. “There is no real scenario where China disrupts the bond market in a way that the Fed cannot compensate.”
On the contrary, there might be some upside for US companies if Chinese investors, who lack local opportunities, moved more of their money to the US. China’s direct investment in US assets is relatively low and may face new hurdles as states seek to erect barriers to Chinese purchases of US real estate and businesses. But places that welcome it can benefit.
“Given that the US seems to be doing relatively well, it is possible that money will come to the US, in search of a higher return and in search of safety,” said Eswar Prasad, a professor of trade policy at Cornell University.
The wild card of geopolitics.
Aside from any direct financial and economic repercussions, it is worth considering whether a faltering China will meaningfully alter the geopolitical dynamics and interests of the United States.
Washington has long worried that a Chinese-dominated trade bloc could limit market access for US firms by, for example, creating rules that contain weak intellectual property protection. Such a business agreement It will enter into force in early 2022 After the United States abandoned its efforts to form the Trans-Pacific Partnership.
But if China appears less powerful, it may lose its appeal in a divided world. Countries that have eagerly taken loans from China to finance large infrastructure projects may turn to international lending institutions such as the World Bank, despite their stricter requirements.
“The fact that the Chinese economy is seen to be in trouble, combined with more aggressive outreach in Asia and elsewhere by the Biden administration, has shifted the balance a bit,” said Dr. Prasad.
Do the economic conditions experienced by China affect its willingness to engage in any military adventures, such as the invasion of Taiwan? While the Communist Party leadership might seek to stir up patriotism through such an attack, Dr. Prasad believes that the fragile economy would actually make the use of military force less likely, given the resources required to maintain this type of engagement.
One thing to keep in mind: while China appears to be going through a rough patch, the outlook is uncertain. There is debate in think tank circles as to whether the country’s economic structure will be sustainable in the long run or if it is fundamentally unsound.
It would not be wise to regard China as the next Japan, which is on the brink of a prolonged recession, said Hewaii Tang, professor of economics at the University of Hong Kong Business School in Hong Kong.
“I remain optimistic that the government is still very resilient and should respond to any potential crisis,” said Dr. Tang. “They know what needs to be done. It’s only a matter of time before they come to some kind of consensus to do something.”
Anna Swanson And Jason Karayan Contributed to reports.