- By Nick Marsh
- Asia sales correspondent
There is a saying that when the United States sneezes, the rest of the world catches a cold. But what happens when China is not feeling well?
The world’s second-largest economy, home to more than 1.4 billion people, faces a host of problems, including slow growth, high youth unemployment and a property market in disarray.
Even if these issues pose a real headache for Beijing, how much does it matter to the rest of the world?
Analysts say fears of impending global catastrophe are overblown. But multinational corporations, their workers and even people with no direct ties to China will likely feel at least some effects. Ultimately, it depends on who you are.
Winners and losers
“If Chinese people start cutting back on eating out for lunch, for example, will that affect the global economy?” asked Deborah Elms, executive director of the Asian Trade Center in Singapore.
“The response is not as big as one might imagine, but it certainly affects companies that directly depend on Chinese domestic consumption.”
Hundreds of major global companies such as Apple, Volkswagen and Burberry derive much of their revenue from China’s vast consumer market and will be hit by lower household spending. The impact will then be felt on the thousands of suppliers and workers around the world who rely on these companies.
Considering that China is responsible for more than a third of global growth, any form of deceleration will be felt beyond its borders.
US ratings agency Fitch said last month that China’s slowdown was “casting a shadow over global growth prospects” and cut its forecast for the entire world in 2024.
However, some economists say the idea that China is the engine of global prosperity has been exaggerated.
“Mathematically, yes, China accounts for about 40% of global growth,” says George Magnus, an economist at the China Center at the University of Oxford.
“But who benefits from this growth? China has a huge trade surplus. It exports far more than it imports, so China’s growth or lack thereof depends more on China than on the rest of the world. “
Still, China spending less on goods and services – or housing construction – means less demand for raw materials and commodities. In August, the country imported almost 9% less than the same period last year – when it was still under zero Covid restrictions.
“Large exporters like Australia, Brazil and several African countries will be hit hardest by this,” says Roland Rajah, director of the Indo-Pacific Development Center at the Lowy Institute in Sydney.
Low demand in China also means prices there will remain low. From the point of view of Western consumers, this would be a welcome way to curb price increases without further raising interest rates.
“This is good news for individuals and businesses struggling with high inflation,” says Rajah. Thus, in the short term, ordinary consumers could benefit from the Chinese slowdown. But longer-term questions arise for people in developing countries.
Over the past decade, China has invested more than $1 trillion in massive infrastructure projects known as the Belt and Road Initiative.
More than 150 countries have received Chinese money and technology to build roads, airports, seaports and bridges. According to Rajah, Chinese commitment to these projects could begin to suffer if economic problems persist in the country.
“From now on, Chinese companies and banks will no longer have the same financial largesse to spend abroad,” he says.
Although a reduction in Chinese overseas investment is a possibility, it is unclear to what extent China’s domestic economic situation will affect its foreign policy.
A more vulnerable China may seek repairs, some say damaged relations with the United States. US trade restrictions partly contributed to a 25% drop in Chinese exports to the US in the first half of this year, while US Commerce Secretary Gina Raimondo recently called the country “uninvestable”. » for certain American companies.
But there is no sign that the Chinese approach is softening. Beijing continues to retaliate with its own restrictions, frequently castigates Western countries’ “cold war mentality” and appears to have good relations with authoritarian leaders of sanctioned regimes, such as Vladimir Putin in Russia and Bashar Al-Assad in Syria.
At the same time, many U.S. and European officials continue to visit China every month to continue bilateral trade negotiations. The truth is that few people really know what is between Chinese rhetoric and Chinese politics.
One of the most extreme interpretations of this uncertainty comes from hawkish observers in Washington, who say a slowdown in China’s economy could impact how it treats Taiwan, the self-governing island that Beijing claims as its own territory.
Speaking earlier this month, Republican Rep. Mike Gallagher, chairman of the U.S. House Select Committee on China, said domestic problems were making Chinese leader Xi Jinping “less predictable” and could threaten him. to “do something very stupid” with regard to Taiwan.
The idea is that if, as Mr Rajah argues, it becomes clear that China’s “economic miracle is over”, then the Communist Party’s response “could prove very far-reaching”.
However, many reject this idea, including US President Joe Biden. Asked about the possibility, he said Xi currently had his “hands full” dealing with the country’s economic problems.
“I don’t think this will lead to China invading Taiwan, quite the opposite. China probably doesn’t have the same capability as before,” Biden said.
Expect the unexpected
However, if there is one lesson to be learned from history, it is to expect the unexpected. As Ms. Elms points out, few people before 2008 predicted that subprime mortgages in Las Vegas would send shockwaves through the global economy.
The echoes of 2008 worried some analysts about what is called “financial contagion”. This includes the nightmare scenario of a real estate crisis in China leading to a total collapse of the Chinese economy, triggering a worldwide financial meltdown.
It is certainly tempting to draw parallels with the subprime mortgage crisis – which saw the collapse of Wall Street investment giant Lehman Brothers and a global recession. But, according to Mr. Magnus, this information is not entirely accurate.
“It’s not going to be a Lehman-type shock,” he says. “China is unlikely to let its big banks fail – and its balance sheets are stronger than those of the thousands of regional and community banks that have failed in the United States.”
Ms. Elms agrees: “China’s real estate market is not tied to its financial infrastructure in the same way that U.S. subprime mortgages are. Furthermore, China’s financial system is not dominant enough for there to be a direct global impact, as we saw in the United States in 2008.”
“We are globally interconnected,” she says. “When one of the key drivers of growth doesn’t work, it affects the rest of us, and it often affects the rest of us in ways that weren’t intended.”
“That’s not to say we’re headed for a repeat of 2008, but the fact is that what sometimes seem like local and national concerns can have an effect on all of us. Even in ways we wouldn’t have. Imagined. “.