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What China’s economic troubles mean for the world

The Economist | August 22, 2023

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Only eight months ago China’s economy was expected to roar back to life.   Yet the rebound has fizzled out, with weak growth and deflation the result. This will not only affect its people.   Because China is so big, its changing economic fortunes can drive overall global growth figures. But a slowing China also directly affects other countries’ prospects. Its households and companies will buy fewer goods and services than they would have otherwise, with consequences for both the producers of these goods and other consumers of them. In some places, China’s difficulties will be a source of pain. In others, though, they will bring relief.

Commodity exporters are especially exposed to China’s slowdown. The country guzzles almost a fifth of the world’s oil, half of its refined copper, nickel and zinc, and more than three-fifths of its iron ore. China’s property woes will mean it requires less of such supplies. That will be a knock for countries such as Zambia.

Weak spots in the West include Germany. Faltering demand from China is one reason why the country’s economy has either contracted or stagnated over the past three quarters. And some Western companies are exposed through their reliance on China for revenues. In 2021 the 200 biggest multinationals in America, Europe and Japan made 13% of their sales in the country, earning $700bn. Tesla is more exposed still.  Provided the slowdown does not escalate into a full-blown crisis, the pain will remain relatively concentrated. 

When set against this backdrop, China’s slowing growth should even provide a measure of relief for the world’s consumers, since it will mean less demand for commodities, bringing down prices and import costs. That in turn will ease the task faced by the Federal Reserve and other central banks. Many have already raised rates to their highest level in decades, and would not relish having to go further still.

But what if things go badly wrong in China? Under a worst-case scenario, a property meltdown could reverberate through the world’s financial markets. A study published by the Bank of England in 2018 found that a “hard landing” in China, where economic growth fell from 7% to -1%, would cause global asset prices to fall and rich-world currencies to rise as investors rushed in the direction of safer assets.  A longer slowdown could lead China to turn inward, reducing its overseas investments and loans. Having become the world’s biggest bilateral creditor in 2017, it has already cut back as projects turn sour. Officials may become fussier still if they are firefighting at home.  Real difficulties at home would also change how the world perceives China. Rapid growth, along with generous overseas lending, boosted the country’s reputation.

3 key takeaways from the article

1. Only eight months ago China’s economy was expected to roar back to life.  Yet the rebound has fizzled out, with weak growth and deflation the result. 
2. Its households and companies will buy fewer goods and services than they would have otherwise, with consequences for both the producers of these goods and other consumers of them. In some places, China’s difficulties will be a source of pain. In others, though, they will bring relief.  When set against this backdrop, China’s slowing growth should even provide a measure of relief for the world’s consumers, since it will mean less demand for commodities, bringing down prices and import. 
3. Provided the slowdown does not escalate into a full-blown crisis, the pain will remain relatively concentrated.  But what if things go badly wrong in China? 

Full Article

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Topics:  China, Recession, Global Economy