When the United States sneezes, the rest of the world catches a cold, so the adage goes. But what happens if China becomes ill?
The world’s second-largest economy, home to more than 1.4 billion people, is dealing with a slew of issues, including weak growth, rising young unemployment, and a shaky housing market.
Evergrande’s chairman has been placed under police monitoring, and the company’s shares have been halted on the stock exchange.
While these concerns are causing enormous headaches for Beijing, how important are them to the rest of the world?
Analysts feel that fears of a worldwide disaster are exaggerated. However, international firms, their employees, and even those with no direct ties to China are likely to suffer some of the consequences. It really comes down to who you are.
There are winners and losers.
“Does it affect the global economy if Chinese people cut back on eating out for lunch, for example?” wondered Deborah Elms, executive director of the Asian Trade Centre in Singapore.
“The answer is not as much as you might imagine, but it certainly does hit firms who directly rely on domestic Chinese consumption.”
Hundreds of large global corporations, like Apple, Volkswagen, and Burberry, get a large portion of their income from China’s massive consumer market and will be impacted by lower household spending. The consequences will be felt by the thousands of suppliers and workers that rely on these enterprises throughout the world.
When you consider that China is responsible for more than a third of global GDP, any slowdown will be felt well beyond its boundaries.
Last month, the US credit rating agency Fitch stated that China’s downturn was “casting a shadow over global growth prospects” and reduced its projection for the entire globe in 2024.
However, other economists believe that the notion that China is the engine of global growth is overdone.
“Mathematically, yes, China accounts for around 40% of global growth,” says George Magnus, a China Centre economist at the University of Oxford.
“But who benefits from this growth?” China has a massive trade surplus. It sells far more than it buys, therefore how much China grows or does not expand has far more to do with China than with the rest of the world.”
Nonetheless, if China spends less on products and services – or on housing – there would be less demand for raw resources and commodities. In August, the country imported about 9% less than it did the previous year, when it was still subject to zero-Covid restrictions.
Big exporters such as Australia, Brazil, and several African countries will be hardest hit by this,” says Roland Rajah, head of the Indo-Pacific Development Centre at the Lowy Institute in Sydney.
Weak demand in China ensures that prices will remain low. From the standpoint of Western consumers, it would be a welcome means of containing growing costs without hiking interest rates further.
“This is good news for people and businesses struggling to deal with high inflation,” adds Rajah. As a result, regular consumers may gain from China’s downturn in the near run. However, there are longer-term concerns for people in poor countries.
China is projected to have invested more than a trillion dollars on massive infrastructure projects known as the Belt and Road Initiative during the previous ten years.
Chinese money and technology have been used to develop highways, airports, seaports, and bridges in over 150 nations. According to Mr Rajah, if domestic economic troubles linger, China’s commitment to these initiatives may suffer.
“Now Chinese firms and banks won’t have the same financial largesse to splash around overseas,” according to him.
China’s place in the world
While decreased Chinese investment overseas is a possibility, it is unknown how China’s home economic position would effect its foreign policy in other ways.
Some suggest that a more vulnerable China may seek to mend strained ties with the United States. American trade restrictions have contributed to a 25% reduction in Chinese exports to the US in the first half of this year, while US Trade Secretary Gina Raimondo recently labeled the nation “uninvestable” for some American companies.
However, there is no sign that China’s stance is changing. Beijing continues to react with its own limitations, constantly criticizes the “Cold War mentality” of Western countries, and appears to retain excellent connections with authoritarian leaders of sanctioned regimes such as Russia’s Vladimir Putin and Syria’s Bashar Al-Assad.
At the same time, a steady stream of US and EU officials continues to visit China each month to maintain bilateral trade discussions. The fact is that few people understand the difference between Chinese rhetoric and Chinese policy.
One of the most extreme interpretations of this uncertainty comes from hawkish watchers in Washington, who argue that a slowing Chinese economy might affect how Beijing behaves with Taiwan, the self-governing island that Beijing claims as its own territory.
Republican Congressman Mike Gallagher, chair of the US House Select Committee on China, stated earlier this month that domestic concerns were making China’s leader Xi Jinping “less predictable” and may lead him to “do something very stupid” with regard to Taiwan.
The notion is that if it becomes clear that China’s “economic miracle” is finished, as Mr Rajah claims, the Communist Party’s reaction “could prove very consequential indeed.”
However, many others, including US Vice President Joe Biden, reject this concept. When asked about this prospect, he stated that Mr. Xi now has his “hands full” dealing with the country’s economic issues.
“I don’t believe it will prompt China to invade Taiwan; in fact, I believe it will have the opposite effect.” “China probably does not have the same capacity as it did previously,” Mr Biden added.
Be prepared for the unexpected
However, if history teaches us anything, it is to expect the unexpected. As Ms Elms points out, few people predicted that subprime mortgages in Las Vegas would send shockwaves across the global economy before 2008.
Some experts are concerned about “financial contagion” as a result of the echoes of 2008. This includes the nightmare scenario of China’s housing crisis resulting in a full-fledged collapse of the Chinese economy, causing global financial devastation.
Comparisons to the subprime mortgage crisis, which resulted in the fall of Wall Street investment firm Lehman Brothers and a worldwide recession, are definitely tempting. However, according to Mr Magnus, they are not entirely correct.
“This is not going to be a Lehman-type shock,” he adds. “China is unlikely to let their big banks go bust – and they have stronger balance sheets than the thousands of regional and community banks that went under in the US.”
Ms Elms concurs: “China’s property market is not linked to their financial infrastructure in the same way that American subprime mortgages were.” Furthermore, China’s financial system is not powerful enough to have a direct global influence, as we witnessed with the United States in 2008.”
“We are globally interconnected,” she asserts. “When you have one of the large engines of growth not functioning it affects the rest of us, and it often affects the rest of us in ways that weren’t anticipated.”
“That’s not to say I believe we’re headed for a repeat of 2008, but the point is that what appear to be local, domestic concerns can have an impact on us all.” Even in ways we couldn’t have predicted.”