What China’s economic woes could mean for the United States

The news about the Chinese economy over the past few weeks has been daunting, to say the least.

The country’s growth has gone from its usual strong annual rate of 8 percent to more than 3 percent. Real estate companies are imploding after a decade of overbuilding. And Chinese citizens, frustrated by the long coronavirus-related lockdowns and the loss of trust in the government, have failed to emerge from the unease caused by the pandemic in the country.

If the world’s second-largest economy stumbles so badly, what does that mean for the largest?

Short answer: At this time, the implications for the US are likely to be minor, given China’s limited role as a customer for US products and the minor ties between the two countries’ financial systems.

In a note released Thursday, Wells Fargo simulated a “hard landing” scenario for China in which production over the next three years would be 12.5 percent lower than previous growth rates would have reached – an impact similar to the impact of a crisis from 1989 to 1991. under these conditions, the American economy would only reduce its inflation-adjusted growth by 0.1% in 2024 and by 0.2% in 2025.

This could change, however, if China’s current fragilities worsen and lead to a collapse that drags down an already slowing global economy.

“That doesn’t necessarily help matters, but I don’t think it’s a major factor in determining the outlook for the next six months,” said Neil Shearing, chief economist at Capital Economics Group, an analyst firm. and advice. recent webinar. “Unless the outlook for China deteriorates significantly.”

A potential balm against inflation, but a threat to factories.

When 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 is well past the consumer boom during the pandemic that generated $536.8 billion in imports from China in 2022. This year, with home offices and patios filled with furniture and d electronic devices, Americans are spending their money on cruises and Taylor Fast Tickets instead. This is reducing demand for products from Chinese factories – which had already been weakened by a series of tariffs launched by former President Donald J. Trump and which the Biden administration has largely kept in place.

For years, Chinese leaders have said they want to rely more on the country’s households to drive economic growth. But they have taken few steps to support domestic consumption, such as bolstering social protection programs, which would persuade residents to spend more of the money they currently save in an emergency.

This is why some fear that China is once again content to encourage exports to stimulate growth. Such a strategy could be successful given that the Chinese currency, the renminbi, is very weak against the dollar and it is possible to evade customs duties on most products by assembling Chinese parts in other countries. , such as Vietnam and Mexico.

A surge in exports would have offsetting effects. This could lower prices for consumer goods, which, along with lower Chinese demand for products like gasoline and iron ore, would help reduce inflation in the United States. At the same time, it could thwart efforts to resuscitate US manufacturing, raising the political temperature ahead of the presidential election.

“I fear that an export-led Chinese recovery will come up against a world that is reluctant to become ever more dependent on China for its manufactured goods, and that would become a source of tension,” said Council senior fellow Brad Setser. on manufactured goods. Foreign relations.

And what about goods flowing the other way, from the United States to China? That’s not a huge volume: China accounted for just 7.5% of US exports in 2022. US companies have long sought to further develop the Chinese market, especially for agricultural products like pork and rice, but the success was disappointing. In 2018, the Trump administration brokered a pact under which China would buy billions more worth of produce from American farmers.

These goals were never achieved. With the decline in appetite in China, they may never be. This could lead to lower food prices globally, but farmers would suffer.

“If their demand for corn and soybeans increases, that’s good for everyone who produces corn and soybeans around the world,” said Roger Cryan, chief economist for the American Farm Bureau Federation. “It’s something to worry about in the future.”

Insulation for US institutions and investors.

So much for the general dynamics of trade. But the U.S. economy is made up of millions of businesses facing unique concerns, and some may have more reason to worry as China’s economy crumbles.

Tesla, for example, made inroads into the Chinese market, but sales there have slumped in recent months amid stiff competition from local brands offering cheaper models. Apple generates around 20% of its revenue in China, which could also suffer as residents choose cheaper products.

US banks that do business globally have seen slower growth; Citigroup chief executive Jane Fraser said on the company’s second-quarter earnings conference call that China was its “biggest disappointment.”

Chinese tourists also invest money in US cities when they visit them, which they may do less in the future. Glenn Fogel, chief executive of Booking Holdings – which includes travel sites such as Booking.com and Priceline – said on its earnings conference call that their overseas business from China had been anemic.

“I don’t expect a recovery in China for some time, probably a long time,” Fogel said.

However, these effects are likely to be mitigated. Even as the economic situation darkens, the US and Chinese banking systems are separated enough to insulate US institutions and investors, except for the few who might have invested in real estate developers like Evergrande or Country Garden.

“There are no realistic channels for financial contagion from China to the United States,” Dr. Setser said. Even if the Chinese central bank could refrain from buying US Treasuries, he pointed out, any impact on the market as a whole could be contained. “There is no real scenario in which China disrupts the bond market in a way that the Fed cannot compensate for.”

On the contrary, American companies could benefit if Chinese investors, in the absence of domestic opportunities, transferred more of their money to the United States. China’s direct investment in U.S. assets is relatively small and could face new hurdles as states seek to erect barriers to Chinese purchases of U.S. real estate and commercial businesses. But the places that host it could benefit from it.

“Given that the United States appears to be doing relatively well, money could flow into the country, both in search of higher returns and in search of security,” said Eswar Prasad, professor of trade policy at Cornell University.

The joker of geopolitics.

Beyond the direct financial and economic fallout, it is worth asking whether a faltering China significantly alters geopolitical dynamics and US interests.

Washington has long feared that a China-dominated trading bloc could limit market access for U.S. companies by establishing rules that, for example, contain weak protections for intellectual property. Such a trade deal came into effect in early 2022 after the United States abandoned efforts to form the Trans-Pacific Partnership.

But if China appears less powerful, it risks losing its appeal in a fractured world. Countries that have enthusiastically borrowed from China for large infrastructure projects could turn to international lending institutions like the World Bank, despite their stricter requirements.

“The fact that China’s economy is perceived to be in dire straits, in addition to the Biden administration’s more aggressive intervention efforts in Asia and elsewhere, has shifted the balance somewhat,” Dr. Prasad said.

Could China’s economic situation affect its willingness to undertake military adventures, such as an invasion of Taiwan? Although Communist Party leaders might seek to stoke patriotic spirits with such an attack, Dr. Prasad believes that a faltering economy would actually make the use of military force less likely, given the resources needed to sustain such an attack. ‘commitment.

One thing to keep in mind: although China appears to be going through a tough time, the outlook is uncertain. There is a debate raging in think-tanks over whether the country’s economic structure will be sustainable in the long term or whether it will be fundamentally fragile.

Heiwai Tang, an economics professor at HKU Business School in Hong Kong, said it would be unwise to cast China as the next Japan, on the brink of prolonged stagnation.

“I remain optimistic that the government is still very nimble and should be responsive to a potential crisis,” Dr Tang said. “They know what to do. It’s only a matter of time before they come to some sort of consensus to do something.

Ana Swanson And Jason Karaian contributed reports.