A weakened China is bad news for companies like Farmington, Conn.-based Otis. China is the most profitable market for new equipment sales and accounted for last year’s sales. Approximately one-third of order. Throughout the first half of this year, China was the only major market for the company to see a decline in orders.
However, the elevators that Otis sells in China are manufactured in China. So while the downturn in the real estate market means fewer properties are needed, most of the pain will be felt at Otis facilities in China rather than in the United States. Despite China’s remarkable progress and prosperity, it is not such an important customer of products produced in other countries that its woes are contagious. At least for now.
“China has not been as much of a growth driver as widely thought,” said Brad Setzer, a former trade adviser in the Biden administration. “The immediate effects of the economic slowdown will be relatively modest.Whether China grows at zero or 5%, it matters to the export side of the U.S. economy. isn’t it.”
The situation could worsen if China’s economic slowdown were deeper than expected and spooked global financial markets, or if the government artificially devalued its currency for export purposes to get out of the crisis at the expense of its trading partners. may change.
But economists say a downshift in China’s economy is likely to reduce global growth by just a few tenths of a percentage point. One sign of the country’s modest influence can be seen in its trade in manufactured goods such as industrial equipment, automobiles, furniture, and electrical appliances.
China imports only 3.5% of its gross domestic product for industrial products for its own use rather than to manufacture products for customers in other countries, Setzer said. And China’s dependence on overseas factories is about one-third lower than it was when Xi Jinping took over as national leader in 2012 and accelerated the push toward self-sufficiency.
“This is unusually low,” said Setzer, now a senior fellow at the Council on Foreign Relations. “China manufactures almost every industrial product consumed.”
Otis has factories in Tianjin and near Shanghai, and has been operating in China since the mid-1990s. Its elevators and escalators are used in infrastructure projects such as the Tianjin subway, as well as residential and commercial developments at the center of China’s real estate bubble.
Although the downturn in the real estate market is weighing down orders for new equipment, demand for maintenance of installed units remains strong, Marks said. told investors In July, Otis reported higher quarterly sales and profits.
To be sure, China’s economic downturn will be prolonged, or worse than expected, and will be felt around the world. Major commodity producers will be the first to suffer. Decades of China’s economic miracle have sucked copper from Peru, ore from Australia, soybeans from Brazil, and oil from Saudi Arabia and Russia.
Direct financial ties between the United States and China have weakened in recent years amid trade wars and rising geopolitical tensions. However, if China’s recession deepens, the combination of falling stock and bond prices, rising volatility, and a strong dollar could create a “negative feedback loop” that undermines consumer and business confidence in the United States and other countries. There is a possibility that
Such a scenario is similar to the aftermath of the 2015 Chinese stock market crash and could reduce global growth by 0.5 percentage points and U.S. growth by 0.3 percentage points, said Gregory Daco, chief economist at EY Parthenon. That’s what it means.
“What matters for the United States and the rest of the world is whether the China shock leads to a broader deterioration in overall financial conditions,” he said.
China’s neighbors are already feeling the chill. However, the decline in exports to China is primarily a result of U.S. consumers purchasing fewer electronics than during the work-from-home period of the pandemic, rather than a result of weakness within China.
China is at the center of the pan-Asian electronics supply chain, assembling products using parts shipped from South Korea, Malaysia, Thailand and Taiwan.
Multinational companies serving China’s domestic market will also be hit. German automaker BMW relies on China for more than 29% of its annual revenue. More than 27% of Intel’s sales come from Chinese customers.
“China is important to the global economy. Germany is a big exporter to it. It’s important for commodity markets. It sets the tone for emerging Asia,” said Nathan Sheets, global chief economist at Citigroup.
But China’s old growth model, which relied on heavy investment in public infrastructure and housing, is exhausted. After decades of frenzied growth, the country has nearly all the high-speed rail and multifamily housing it could ever need.
Chinese leaders have said they intend to pivot to an economy based on more consumer spending and service industries. But “we still have a long way to go,” Sheets said.
The current economic slowdown highlights China’s changing global image. For years, China’s vast domestic market has beckoned multinational companies with the promise of huge profits. It seemed certain that Japan would surpass the United States and become the world’s largest economic power.
Currently, the outlook is less optimistic. China’s second-quarter growth rate was just over 3% annually, a far cry from the average of about 9% during the first three decades of economic reform. The aging workforce is shrinking, and Mr. Xi has prioritized loyalty to the Communist Party over economic expansion.
Commerce Secretary Gina Raimondo visited Beijing last week and said she had been told by American business executives that China was “uninvestable” because of the government’s increasingly erratic treatment of foreign companies.
“China’s growth has slowed and construction has declined. It’s not going to be the special center that it once was,” said Scott Kennedy, a senior adviser at the Center for Strategic and International Studies.
International Monetary Fund says China will contribute more than one-third Supporting global growth this year. But some economists say this number overstates China’s influence on its trading partners. Rather, it proves the arithmetical truth that for all its problems, China is a large economy that is growing faster than other countries. This provides significant output gain, but most of the benefits remain.
China runs a large trade surplus with other countries, meaning it sells far more to other countries than it buys from. While Chinese exporters dominate global markets in products such as electronics, footwear and aluminum, Chinese consumers save much of their income rather than spend it on foreign goods.
Overseas demand for Chinese goods has slumped as the Federal Reserve and other major central banks have tried to cool inflation by raising interest rates over the past year. Through July, China’s exports were 5% lower than the same period in 2022, while imports were down nearly 8%, meaning the surplus has widened.
“Countries with trade surpluses are essentially subtracting more from global growth than they are contributing to it,” said George Magnus, an economist at Oxford University’s China Center. “Rather than contributing, I often do it for my own growth.”
Exports have been a central element of China’s economic strategy for decades. Government officials have repeatedly spoken about promoting domestic consumption. But over the past three years, China’s export sector accounted for more than a fifth of the country’s annual economic growth, the largest share since the 1997 Asian financial crisis, according to CSIS’ China Power Project.
China started the year with hopes of a boom. In December, Mr. Xi reluctantly relaxed his strict zero-coronavirus policy after a rare public outcry. Chinese consumers, emerging from lockdown, were expected to drive the economic recovery.
But after spending soared, the recovery slowed. Latest government data this week showed China’s factories, consumers and property developers are all in recession.
“They’re structurally in a deep hole and it’s going to be very difficult for them to climb out of it,” said Andrew Collier, managing director at Orient Capital Research in Hong Kong.
Chinese authorities have taken a number of measures to revive growth, including lowering interest rates. But they have made little progress. Additionally, more than 21 percent of young people are unemployed, and the possibility of social unrest looms.
One lever the Chinese government has yet to pull is manipulating the value of its currency.
The yuan has depreciated by 5% against the dollar this year, reflecting slowing Chinese growth and falling interest rates. The government could further weaken the renminbi by selling it on the global market. That would effectively discount Chinese goods, making them cheaper for customers paying in dollars or euros.
Dominating overseas markets with Chinese-made products will increase export revenue and domestic employment. However, it is certain that relations with the United States and Europe, which are already rocky, will deteriorate.
There is no indication yet that Chinese authorities are planning such a move. However, this may become the case if the economic deterioration accelerates.
After all, they’ve done it before. China has long undervalued its currency since joining the global trading system in 2001, leading to years of complaints from the U.S. government and U.S. companies.