What China’s Economic Woes May Mean for the U.S.

To put it plainly, the recent economic news out of China has been alarming.

From its usual rapid 8 percent yearly pace, the country's growth has slowed to more like 3 percent. After a decade of overbuilding, real estate corporations are collapsing. In addition, the inhabitants of China have been unable to consume their way out of the depression brought on by the pandemic, exasperated by protracted coronavirus lockdowns and losing faith in the leadership.

What does it signify for the largest economy in the world if the second-largest is struggling so badly?

Short answer: Right now, given China's modest role as an American product consumer and the tenuous ties between the nations' financial institutions, the repercussions for the United States are probably minimal.

In a report released on Thursday, Wells Fargo modeled a "hard landing" scenario for China in which output over the following three years would be 12.5% lower than past growth rates would produce — a situation resembling the effects of a slump from 1989 to 1991. Even in those circumstances, the U.S. economy's inflation-adjusted growth would only be reduced by 0.1 percent in 2024 and 0.2 percent in 2025.

But that might alter if China's present trembling turns into a collapse that drags down a sluggish global economy.

“It doesn’t necessarily help things, but I don’t think it’s a major factor in determining the outlook in the next six months,” Neil Shearing, the chief economist at Capital Economics Group, an analysis and consulting firm, said in a recent webinar. “Unless the outlook for China becomes substantially worse.”

A potential balm for inflation, but a threat to factories.

It's critical to acknowledge that the United States has contributed in some way to China's problems when examining the economic ties between the two nations.

The pandemic-induced surge in American consumption from 2022, which resulted in $536.8 billion in imports from China, is long gone. This year, Americans are choosing to spend their money on cruises and Taylor Swift tickets rather than filling their patios and home offices with furniture and equipment. This decreases the demand for products made in Chinese factories, which was already weakened by a huge number of tariffs that former President Donald J. Trump initiated and the Biden administration mostly maintained.

China's officials have long said that the country needs to rely more on its households to generate economic growth. However, they haven't done much to encourage domestic spending, including strengthening safety net programs that would encourage citizens to spend more of the money they already set aside for emergencies.

Because of this, some people worry that China may once more rely on promoting exports to support growth. Given that the yuan, the currency of China, is extremely vulnerable to the dollar and that it is easy to avoid taxes on the majority of goods by assembling Chinese components in other nations, such as Vietnam and Mexico, such a plan may be successful.

A spike in exports would have opposing impacts. It might bring down the cost of consumer products, which would aid in bringing down inflation in the US coupled with a decline in Chinese demand for commodities like iron ore and petroleum. It could also undermine efforts to revive American industry, escalating the political climate as the presidential election draws near.

According to Brad Setser, senior fellow at the Council on Foreign Relations, "my fear is that an export-based Chinese recovery will run up against a world that is reluctant to become ever more dependent on China for manufactures, and that becomes a source of tension."

What about merchandise moving in the opposite direction, from the United States to China? China only contributed for 7.5 percent of American exports in 2022, so it's not a huge amount. Long-standing efforts by American companies to expand the Chinese market have met with mixed results, particularly for agricultural items like rice and pork. In 2018, the Trump administration reached a deal that would see China increase its purchases from American farmers by billions of dollars.

Those goals were never accomplished. They might never be given China's declining appetite. Global food prices may decrease as a result, but farmers will suffer.

According to Roger Cryan, the American Farm Bureau Federation's senior economist, "if their demand for corn and soybeans is increasing, that's good for everyone who produces corn and soybeans around the world." Future worry should be expressed over this.

Insulation for American institutions and investors.

So much for the dynamics of global trade. However, the U.S. economy is made up of millions of businesses, each of which has its own problems. As China's economy struggles, some of these businesses may become even more concerned.

For instance, Tesla had established itself in the Chinese market, but because to fierce competition from regional companies offering more affordable models, sales there have recently declined. About 20% of Apple's income comes from China, which could suffer as consumers opt for less expensive goods.

American banks with international operations have observed sluggish growth; Citigroup's CEO, Jane Fraser, stated on the company's results call for the second quarter that China had been its "biggest disappointment."

Chinese visitors spend a lot of money in American cities while they are there, though this may decrease in the future. In his earnings call, Glenn Fogel, the chief executive of Booking Holdings, which comprises popular travel sites like Booking.com and Priceline, lamented the lackluster outbound business from China.

"I don't expect a recovery in China for us for some time, significant time probably," said Mr. Fogel.

However, those effects are probably going to be minimal. Even if the economic outlook worsens, U.S. institutions and investors will be protected by the American and Chinese banking systems, with the exception of the select few who may have invested in real estate developers like Evergrande or Country Garden.

According to Dr. Setser, there are no plausible routes for financial contagion from China to the United States. He pointed out that while China's central bank might postpone purchasing US Treasury bonds, any effects on the market as a whole might be limited. There is no actual scenario where China's disruption of the bond market would be too great for the Fed to make up for.

Contrarily, if Chinese investors transfer more of their capital to the United States due to a lack of domestic prospects, there may be some positive effects for American businesses. As states work to create barriers to Chinese purchases of U.S. real estate and commercial firms, China's direct investment in U.S. assets, which is currently quite limited, may encounter new challenges. However, those locations might profit from it.

According to Eswar Prasad, a professor of trade policy at Cornell University, "given that the U.S. seems to be doing relatively well, you could have money coming to the U.S., both in search of higher yield and in search of safety."

The wild card of geopolitics.

Aside from any immediate financial and economic repercussions, it is important to think about whether the geopolitical landscape and American interests would be significantly affected by a faltering China.

Washington has long been concerned that a trading bloc dominated by China may restrict market access for American businesses by establishing regulations that, for instance, provide lax protections for intellectual property. After the United States gave up on its efforts to create the Trans-Pacific Partnership, such a trade deal went into effect in the early months of 2022.

However, if China appears weaker, it might lose its appeal in a world in flux. Countries that gladly accepted financing from China for significant infrastructure projects may decide to return to more rigorous international lending organizations like the World Bank.

The Biden administration's more aggressive outreach in Asia and elsewhere, along with the perception that the Chinese economy is struggling, have helped to tip the scales in Dr. Prasad's opinion.

Could the state of China's economy influence its readiness to engage in military excursions like an invasion of Taiwan? Dr. Prasad believes that, given the resources needed to sustain that kind of engagement, an unstable economy would actually make the deployment of military action less likely, notwithstanding the possibility that the Communist Party leadership would try to incite patriotic feelings through such an attack.

One thing to remember is that, despite the fact that China seems to be going through a difficult time, the future is still unclear. Whether the country's economic system will be resilient over the long term or fundamentally flawed is a topic of discussion in think tank circles.

It would be foolish to think of China as the next Japan, which is on the verge of protracted stagnation, according to Heiwai Tang, an economist and professor at the HKU Business School in Hong Kong.

In response to a potential catastrophe, the government should still be nimble and responsive, Dr. Tang added. They understand what to do. Before they reach a decision to take action, it's only a question of time.