What China’s economic problems mean for the world

  • Written by Nick Marsh
  • Business correspondent in Asia

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Economists are grappling with how China’s economic slowdown will impact the world

There is a saying that when the United States sneezes, the rest of the world catches a cold. But what happens when China is sick?

The world’s second-largest economy, home to more than 1.4 billion people, faces a host of problems – including sluggish growth, high youth unemployment and a real estate market in disarray.

Although these issues are a major headache for Beijing, how important are they to the rest of the world?

Analysts believe that fears of an imminent global catastrophe are exaggerated. But multinational companies, their workers and even people with no direct ties to China are likely to feel at least some of the effects. In the end, it depends on who you are.

Winners and losers

“If Chinese people start cutting back on eating out for lunch, for example, will that impact the global economy?” asked Deborah Elms, executive director of the Asian Trade Center in Singapore.

“The answer is not as much as you might imagine, but it certainly affects companies that depend directly on domestic Chinese consumption.”

Hundreds of major global companies, such as Apple, Volkswagen, and Burberry, derive a large amount of their revenue from China’s huge consumer market, and will be harmed by reduced household spending. The spillover effects will then be felt by thousands of suppliers and workers around the world who depend on these companies.

When we consider that China is responsible for more than a third of the world’s growth, any kind of slowdown will be felt beyond its borders.

US credit rating agency Fitch said last month that China’s slowdown “casts a shadow over global growth prospects” and lowered its forecasts for the entire world in 2024.

However, according to some economists, the idea that China is the engine of global prosperity is overstated.

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The Chinese economy accounts for more than a third of global growth

“Mathematically, yes, China accounts for about 40% of global growth,” says George Magnus, an economist at the China Center at Oxford University.

“But who benefits from this growth? China has a huge trade surplus. It exports much more than it imports, so how much China grows or doesn’t grow has more to do with China than with the rest of the world.”

However, China spending less on goods and services – or on building housing – means less demand for raw materials and basic goods. In August, the country imported nearly 9% less compared to the same period last year, when it was still under coronavirus-free restrictions.

“Large exporters like Australia, Brazil and many countries in Africa will be the most affected by this,” says Roland Raja, director of the Center for Indo-Pacific Development at the Lowy Institute in Sydney.

Weak demand in China also means prices there will remain low. From a Western consumer’s perspective, this would be a welcome way to limit price increases without involving further interest rate hikes.

“This is good news for people and businesses struggling to cope with high inflation,” says Raja. Therefore, ordinary consumers may benefit in the near term from the slowdown in China. But there are longer-term questions for people in the developing world.

Over the past 10 years, China has invested more than $1 trillion in massive infrastructure projects known as the Belt and Road Initiative.

More than 150 countries have received Chinese funds and technology to build roads, airports, seaports and bridges. According to Mr. Raja, China’s commitment to these projects may begin to wane if economic problems at home persist.

“Now, Chinese companies and banks will not have the same financial generosity to distribute abroad,” he says.

Although a decline in Chinese investments abroad is possible, it is not clear how the domestic economic situation in China will affect its foreign policy.

Some believe that a more vulnerable China may seek to repair damaged relations with the United States. US trade restrictions partly contributed to a 25% drop in Chinese exports to the US in the first half of this year, while US Commerce Secretary Gina Raimondo recently described China as “uninvestable” for some US companies.

But there is no evidence to suggest that China’s approach is softening. Beijing continues to retaliate with restrictions of its own, frequently criticizes the “Cold War mentality” of Western countries, and appears to maintain good relations with the authoritarian leaders of the sanctioned regimes, such as Russian President Vladimir Putin and Syrian President Bashar al-Assad.

Meanwhile, a large number of officials from the United States and the European Union continue to travel to China every month to continue talks on bilateral trade. The truth is that few people really know what lies between Chinese rhetoric and Chinese policy.

One of the more extreme readings of this uncertainty comes from hawkish observers in Washington, who say the decline in China’s economy could affect how it deals with Taiwan, the self-governing island that Beijing claims as its own territory.

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US Secretary of State Antony Blinken (left) met with Chinese leader Xi Jinping on a high-stakes visit earlier this year.

Speaking earlier this month, Republican Congressman Mike Gallagher – chairman of the Select Committee on China in the US House of Representatives – said problems at home make Chinese leader Xi Jinping “less predictable” and could push him to “do something stupid.” “extremely” with respect to Taiwan.

The idea is that if it becomes clear, says Raja, that “the Chinese economic miracle is over,” the Communist Party’s response “could have a really big impact.”

However, there are many people who reject this idea, including US President Joe Biden. When asked about this possibility, he said that President Xi is currently busy dealing with the country’s economic problems.

“I don’t think it will push China to invade Taiwan – on the contrary. China probably doesn’t have the same capability that it had before,” Biden said.

Expect the unexpected

However, if there is one lesson we learn from history, it is to expect the unexpected. As Elms points out, few people before 2008 predicted that Las Vegas subprime mortgages would send shockwaves through the global economy.

The echoes of 2008 have some analysts concerned about what is known as “financial contagion.” This includes the nightmare scenario of a real estate crisis in China leading to a complete collapse of the Chinese economy, leading to a financial collapse around the world.

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China’s exports fell for the fourth straight month in August

To be sure, comparisons with the sub-prime mortgage crisis – which saw the collapse of investment bank giant Lehman Brothers and a global recession – are tempting. But, according to Magnus, these results are not entirely accurate.

“This will not be a Lehman-type shock,” he says. “China is unlikely to let its big banks fail – and it has stronger balance sheets than the thousands of regional and community banks that have collapsed in the US.”

Ms Elms agrees: “China’s real estate market is not linked to the financial infrastructure in the same way that subprime mortgages were in the US. Moreover, the Chinese financial system is not dominant enough to have the direct global impact that we have seen.” From the United States in 2013. 2008.”

“We are globally interconnected,” she says. “When you have one of the big engines of growth not working, it affects the rest of us, and often it affects the rest of us in ways we never expected.”

“This does not mean that I think we are headed towards a repeat of 2008, but the point is that what sometimes appear to be local and local concerns can have an impact on all of us. Even in ways we could not have imagined.”

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