Will China’s slowdown pull the US into recession?

China can’t seem to shake off its post-COVID economic slump. Will that weakness backfire on the American economy? CNBC reported that the People’s Bank of China cut interest rates this week in an effort to spur economic growth, amidst a “confidence crisis” that has seen exports fall dramatically, factory production slow down, and housing sales crater. “In a crisis such as this … you can’t really call it a consumption crisis or investment crisis,” one economist told the network. “It’s really a confidence crisis.”

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“The concern is that that weakness could spill over to the U.S.,” Bloomberg reported. And American officials have taken notice. President Biden earlier this month called China’s economy a “ticking time bomb,” while Treasury Secretary Janet Yellen said the slowdown will have “some spillovers to the United States.” And all of this comes as the U.S. is maneuvering to avert its own recession.

“China’s worsening economy is hurting corporate America,” the Wall Street Journal reported. American companies that are “deeply rooted” in China face strong headwinds, including big corporate names like DuPont, Dow and Caterpillar. Countries like Germany, Austria and Switzerland that depend on exports to China are also hurting. “The China export market is a big deal for them, and China has not rebounded like we all expected it would,” said one observer. Will China’s slowdown hurt the world economy? 

What the commentators are saying

China’s supercharged economy “for many years looked like a miracle,” John Cassidy wrote for the New Yorker, but now it “could be descending into an extended slump.” But China now accounts for a fifth of the world’s economic output, so its current slowdown “has important implications for other countries, including the United States.” A weakened China might bring down the price of gasoline, but it would also depress imports of “factory machinery, electrical equipment, and medical devices” from other countries.” The global consequences of a Chinese recession “are difficult to predict.”

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The slowdown comes as America is “hitting China with trade curbs,” William Pesek noted at Nikkei Asia. Donald Trump imposed tariffs on the country during his presidency, and Biden has presided over a further decoupling from China’s economy. Now the “cumulative collateral damage now bears watching.” A Chinese stumble resembling America’s Great Recession in 2008 would be in nobody’s interest. There is a risk that “the U.S. is going too far, and imperiling its own future.”

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Or maybe China’s economic struggles will benefit the U.S., Matt Phillips wrote at Axios. Its weak economy has produced a weak currency, “meaning its exports are falling in price for foreign buyers, like those in the U.S.” And a continued slowdown means China “will consume fewer raw materials,” resulting in lower commodities prices. Conversely, attempts by the government to jump-start economic growth could end up  “reversing some of the recent downward pressure on U.S. consumer prices.” One thing is clear: “What happens in China … doesn’t just stay in China.”

What’s next?

The question now is how much worse it can get for China, the Japan Times reported. Unlike consumers in the West, Chinese residents “were left largely to fend for themselves during the COVID-19 pandemic” and so they never went on a “revenge spending spree” coming out of the crisis. Now youth unemployment is above 21% and worries about the property market mean that many Chinese “may already feel economic pain as deep as during a recession.” The new interest rate cuts are probably “too small to make a meaningful difference.”

Don’t expect a quick rescue, Barron’s warned. China has a shrinking population, rising debts on the balance sheets of homegrown companies and local governments, and the central government’s efforts to spur the economy have so far proved “underwhelming.” China might be on the path to “a slow-burn, Japanese-style deflationary situation.” That means that U.S. companies that do big business in China — like Caterpillar — are “at risk.” But the American economy should weather the storm, one analyst said. “The least vulnerable economy is the U.S. and the U.S. dollar will continue to move higher and keep outperforming the rest of the world.”

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