- Written by Nick Marsh
- Asian business correspondent
There is a saying that says, “When America sneezes, the rest of the world catches a cold.” But what happens if China goes bad?
The world’s second-largest economy, with a population of more than 1.4 billion people, faces a number of challenges, including low growth, high youth unemployment and a turbulent real estate market.
These issues are causing major headaches for the Chinese government, but how important are they to the rest of the world?
Analysts believe fears of an impending global catastrophe are overblown. But multinational companies and their employees, and even those with no direct ties to China, are likely to feel at least some impact. In the end, it depends on who you are.
winners and losers
“If, for example, Chinese people started eating out less for lunch, would that affect 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 does mean that businesses directly dependent on consumption within China are hurting.”
Hundreds of the world’s biggest companies, including Apple, Volkswagen and Burberry, derive much of their revenue from China’s vast consumer market, but they will be hurt if household spending falls. The ripple effects will affect thousands of suppliers and workers around the world who rely on these companies.
Given that China is responsible for more than a third of global growth, any slowdown will be felt across borders.
Last month, U.S. credit rating agency Fitch downgraded its global outlook for 2024, saying the slowdown in China was “casting a shadow on global growth prospects.”
But some economists say the idea that China is the engine of global prosperity is overstated.
“Mathematically speaking, China certainly accounts for about 40% of global growth,” said George Magnus, an economist at Oxford University’s China Center.
“But who is benefiting from that growth? China has a huge trade surplus. It exports much more than it imports, so it’s hard to see how much China will grow or not.” is actually more of a problem in China than in other parts of the world.”
Nevertheless, China is spending less on goods and services, or on housing construction, meaning there is less demand for raw materials and goods. The country’s imports in August were down nearly 9% compared to the same period last year, when it was still under zero-corona restrictions.
“Big exporters like Australia, Brazil and some African countries will be hit hardest by this,” said Roland Raja, director of the Indo-Pacific Development Center at the Lowy Institute in Sydney.
Weak demand in China means prices there also remain low. From the perspective of European and American consumers, this should be welcomed as a measure to curb price increases that does not involve further interest rate hikes.
“This is good news for people and businesses struggling to cope with high inflation,” said Raja. Therefore, in the short term, general consumers may benefit from the slowdown in China. But there are long-term problems for people in developing countries.
Over the past decade, 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 funding and technology to build roads, airports, ports, and bridges. If economic problems persist at home, China’s commitment to these projects could begin to suffer, according to Raja.
“Now Chinese companies and banks won’t have that much money to fly around overseas,” he says.
Although China’s overseas investment may decline, it is unclear how China’s domestic economic situation will affect its foreign policy.
Some argue that a more vulnerable China could try to repair its damaged relationship with the United States. U.S. trade restrictions have contributed to a 25% drop in China’s exports to the U.S. in the first half of this year, but Trade Secretary Gina Raimondo recently called the country “uninvestable” for some U.S. companies. said.
But there is no evidence that China’s approach is softening. Beijing continues to retaliate with restrictions of its own, frequently attacking the “Cold War mentality” of Western countries and targeting authorities in sanctioned regimes such as Russia’s Vladimir Putin and Syria’s Bashar al-Assad. It appears that he maintains good relations with political leaders.
At the same time, US and EU officials continue to visit China every month to continue discussions on bilateral trade. The truth is that few people really know what lies between China’s rhetoric and China’s policies.
One of the more extreme views on this uncertainty comes from hawkish observers in Washington. They say China’s economic downturn could affect its response to Taiwan, an autonomous island that Beijing claims as its own territory.
Republican Rep. Mike Gallagher, chairman of the U.S. House Select Committee on China, said in a speech earlier this month that domestic issues have made Chinese leader Xi Jinping “unpredictable” and that he believes he has “very high expectations” regarding Taiwan. He said there was a possibility that he would do something stupid.
The idea is that if it becomes clear that China’s “economic miracle is over,” as Mr. Raja argues, the Communist Party’s reaction “could have very serious consequences indeed.” Thing.
However, there are many who reject this idea, including US President Joe Biden. Asked about this possibility, Mr. Xi said he was currently “full” dealing with the country’s economic problems.
“I don’t think it will cause China to invade Taiwan. In fact, the opposite is true. China probably doesn’t have the same capabilities that they had before,” Biden said.
expect the unexpected
But if there’s one lesson to be learned from history, it’s to expect the unexpected. As Ms. Elms points out, before 2008, few people predicted that subprime lending in Las Vegas would send a shockwave through the global economy.
In the aftermath of 2008, some analysts are concerned about a so-called “financial contagion.” This includes a nightmare scenario in which China’s real estate crisis leads to a full-scale collapse of the Chinese economy, triggering a financial meltdown around the world.
It’s certainly tempting to draw parallels between the collapse of Wall Street investment giant Lehman Brothers and the subprime mortgage crisis that sparked the global recession. But Magnus says they’re not entirely accurate.
“This won’t be a Lehman shock,” he says. “China is unlikely to let its big banks fail. And China has a stronger balance sheet than the thousands of local and regional banks that have failed in the United States.”
Ms. Elms agrees: “China’s real estate market is not tied to financial infrastructure in the same way as subprime lending in the United States.And China’s financial system does not have the same direct global influence as seen from the United States.” 2008. ”
“We are interconnected all over the world,” she says. “When one of the big engines of growth isn’t working, it affects the rest of us. And it affects the rest of us, often in unexpected ways.”
“That doesn’t mean we think we’re headed for a repeat of 2008, but the point is that what at times seems like local domestic concerns can impact us all. “It can impact us in ways we don’t even imagine.” ”