The news about China’s economy over the past few weeks has been scary, to put it mildly.
The country’s growth has fallen from its usual brisk 8 percent annual pace to more than 3 percent. Real estate companies are exploding after a decade of overbuilding. And China’s citizens, frustrated by the long coronavirus lockdown and losing confidence in the government, have been unable to get out of the country’s disease-ridden pandemic.
If the world’s second largest economy is stumbling badly, what does it mean for the largest?
Short answer: For now, the implications for the United States are likely to be small, given China’s limited role as a customer for American goods and the minor connections between the financial systems of these countries. country.
In a note published on Thursday, Wells Fargo simulation a “hard landing” scenario for China in which output over the next three years would be 12.5 percent smaller than previous growth rates achieved – similar to the effect of the collapse from 1989 to 1991. Even under under those conditions, the US economy would shave just 0.1 percent off its inflation-adjusted growth in 2024, and 0.2 percent in 2025.
That could change, however, if China’s current skepticism deepens into a downturn that drags down an already slowing global economy.
“It doesn’t necessarily help things, but I don’t think it’s a major factor in determining the outlook for the next six months,” said Neil Shearing, the chief economist at Capital Economics Group, an analysis and research firm in consulting, in a recent webinar. “Unless the outlook for China worsens.”
A potential balm for inflation, but a threat to factories.
Considering the economic relationship between the two countries, it is important to recognize that the United States has played a role in China’s troubles.
The United States has already outpaced a pandemic-era consumption boom that pulled in $536.8 billion worth of imports from China by 2022. This year, with home offices and patios filled with furniture and electronics, spending by Americans spend their money on cruises and Taylor Swift tickets instead. That reduces demand for goods from Chinese factories — already weakened by a portion of tariffs initiated by former President Donald J. Trump and largely kept in place by the Biden administration.
For years, China’s leaders have said they want to rely more on the country’s households to drive economic growth. But they have taken some steps to support domestic consumption, such as saving safety programs, which will encourage residents to spend more of the money they save now in case of emergencies.
That’s why some worry that China may once again fall back on encouraging exports to spur growth. Such a strategy could succeed because the Chinese currency, the renminbi, is very weak against the dollar, and it is possible to avoid tariffs on most items by assembling Chinese parts in other countries — such as Vietnam and Mexico.
The export surge will have a countervailing effect. That could lower prices for consumer goods, which — along with China’s falling demand for commodities like gasoline and iron ore — could help lower inflation in the United States. At the same time, it could hamper efforts to resuscitate American manufacturing, raising political temperatures as the presidential election nears.
“My fear is that the Chinese export-based recovery will run up against a world that is reluctant to become more dependent on China for manufacturing, and that becomes a source of tension,” said Brad Setser, a senior fellow at the Council on Foreign Affairs.
And what about the goods that flow in the other direction, from the United States to China? It is not a large volume — China reached only 7.5 percent of US exports by 2022. American businesses have long sought to further develop the Chinese market, particularly for agricultural products such as pork and rice, but with little success. In 2018, the Trump administration negotiated a deal in which China would buy billions of dollars in products from US farmers.
Those targets were never met. With China’s appetite waning, they may not. That could mean lower food prices around the world, but farmers would be hurt.
“If their demand for corn and soybeans increases, that’s good for everybody who produces corn and soybeans around the world,” said Roger Cryan, the chief economist at the American Farm Bureau Federation. “It’s something to worry about down the road.”
Insulation for American institutions and investors.
So much for general trading dynamics. But the US economy is made up of millions of companies that have specific concerns, and some may be more of a concern as China’s economy falters.
Tesla, for example, has made inroads into the Chinese market, but its sales fell there in recent months in the face of stiff competition from local brands with cheaper models. Apple makes about 20 percent of its revenue in China, which could also take a hit as residents opt for cheaper products.
American banks doing business around the world have noticed a slowdown in growth; Citigroup chief executive Jane Fraser said on the company’s second-quarter earnings call that China had been the “biggest disappointment.”
Chinese tourists also pour money into US cities when they visit, which they may do less of going forward. Glenn Fogel, the chief executive of Booking Holdings — which includes travel websites such as Booking.com and Priceline — said in its earnings call that its outbound business from China had been anemic.
“I don’t expect a recovery in China for us for some time, maybe significant time,” Mr. Fogel said.
Those effects, however, are likely muted. Even as the economic picture darkens, the American and Chinese banking systems are separate enough to insulate US institutions and investors, apart from a few who may have invested in property developers such as Evergrande or Country Garden.
“There are no realistic channels for financial contagion from China to the US,” said Dr. Setser. While China’s central bank could stop buying US Treasury bonds, he said, any impact on the overall market could be contained. “There’s no real scenario where China disrupts the bond market in a way that the Fed can’t offset.”
Conversely, there may be some upside for American companies if Chinese investors, who lack domestic opportunities, move more of their money to the United States. Chinese direct investment in US assets is relatively low and could face new obstacles as states seek to erect barriers to Chinese purchases of US real estate and commercial enterprises. But places that accept it can benefit.
“Because the US is doing relatively well, you can have money coming to the US, both in search of higher yields 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 fallout, it’s worth considering whether a shaky China is significantly altering America’s geopolitical dynamics and interests.
Washington has long been concerned that a China-led trade bloc could limit market access for American companies by setting rules that, for example, contain weak protections for intellectual property. property The said trade agreement implemented in early 2022 after the United States abandoned its push to form the Trans-Pacific Partnership.
But if China appears less powerful, it may lose its attractiveness in a fractured world. Countries eager to get loans from China for big infrastructure projects may turn to international lending institutions like the World Bank, despite their stricter requirements.
“The fact that China’s economy is seen to be in a tough spot, in addition to the more aggressive outreach in Asia and elsewhere by the Biden administration, has slightly shifted the balance,” said Dr. Prasad.
Will China’s economic condition affect its willingness to undertake any military venture, such as an invasion of Taiwan? While the leadership of the Communist Party may seek to stir up patriotic spirits through such an attack, Dr. Prasad that a shaky economy would in fact make it less likely to use military force, given the resources required to maintain that kind of engagement.
One thing to note: Although China appears to be going through a rough patch, the outlook is uncertain. There is a debate in think-tank groups about whether the country’s economic structure will be sustainable in the long run or fundamentally unsound.
Heiwai Tang, an economics professor at HKU Business School in Hong Kong, said it would be unwise to consider China the next Japan, on the brink of prolonged stagnation.
“I remain optimistic that the government is still very quick and should respond to a potential crisis,” said Dr. Tang. “They already know what to do. It’s only a matter of time before they have a consensus to do something.”
Ana Swanson and Jason Karaian contributed reporting.
