China’s Economy Stumbles, but Limited Impact on the US
Over the past few weeks, there has been growing concern about the state of China’s economy. The country’s growth rate has significantly dropped from 8 percent to around 3 percent, causing distress among its citizens. Real estate companies are collapsing due to overbuilding, and the government’s response to the pandemic has led to a lack of consumer confidence. This raises the question of how China’s economic struggles will affect the United States, the largest economy in the world.
According to a note published by Wells Fargo, the impact on the US economy is expected to be minimal. Even in a “hard landing” scenario where China’s output falls by 12.5 percent over the next three years, the US would only experience a 0.1 percent decrease in inflation-adjusted growth in 2024 and a 0.2 percent decrease in 2025. However, if China’s situation worsens and causes a global economic collapse, the outlook could change.
The US has played a role in China’s economic troubles as well. The boom in US consumption during the pandemic led to a decrease in demand for goods from Chinese factories, which were already weakened by tariffs. China’s leaders had expressed a desire to rely more on domestic consumption for growth but have failed to take significant steps to support that. There is concern that China may turn to exporting goods to drive its economy, which could affect American manufacturing and create political tension.
American businesses that have a significant presence in China, such as Tesla and Apple, could also be affected. Tesla’s sales in China have declined due to increased competition from local brands, while Apple derives 20 percent of its revenue from the country. American banks that do business globally, like Citigroup, have also noted slowing growth. Additionally, Chinese tourists, who contribute to the US economy when they visit, may visit less frequently in the future.
However, the overall impact on American institutions and investors is likely to be limited. The US and Chinese banking systems are separate enough to insulate US institutions, and there are no realistic channels for financial contagion from China to the US. In fact, there may be some upside for American companies if Chinese investors move their money to the US in search of higher yield and safety.
It’s also important to consider the geopolitical implications of China’s economic struggles. A weakened China may lose its attractiveness as a dominant trading bloc, potentially leading countries to turn back to international lending institutions instead of relying on China for infrastructure projects. However, the impact on China’s military ambitions, such as an invasion of Taiwan, is uncertain. Some experts believe that a shaky economy would make military engagement less likely due to the significant resources required.
While China’s economic outlook remains uncertain, it is important to avoid prematurely labeling it as the next Japan-style prolonged stagnation. The Chinese government has shown agility in the past, and the long-term sustainability of its economic structure is a matter of debate.
In conclusion, while China’s economic struggles may have some impact on the US, the overall effect is expected to be minor at the moment. The limited role of China as a customer for American goods and the separate financial systems of the two countries help insulate the US from the worst effects. However, if China’s situation deteriorates further, it could have a more significant impact on the global economy and the US.