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What the world’s economic issues with China mean

There is a phrase that states that when the United States sneezes, everyone else gets sick. What transpires, though, if China becomes ill?

More than 1.4 billion people live in the second-largest economy in the world, which is struggling with a number of issues like poor growth, high youth unemployment, and a chaotic real estate market.

How much does it matter to the rest of the world if Beijing has to deal with all of these problems?

Analysts think the threat of a global disaster is exaggerated. However, there is a good chance that some of the repercussions will be felt by global firms, their employees, and even those who have no direct ties to China. In the end, it comes down to who you are.

Losers and winners
Deborah Elms, executive director of the Asian Trade Centre in Singapore, questioned if it would have an impact on the global economy if Chinese people started dining less out for lunch, for instance.

The answer doesn’t affect businesses that directly rely on domestic Chinese consumer as much as you might think, but it does.

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The massive Chinese consumer market, which generates a significant portion of the revenue for hundreds of large multinational corporations like Apple, Volkswagen, and Burberry, will be impacted by consumers spending less. The thousands of suppliers and employees around the world who depend on these enterprises will then experience the ripple effects.

Any slowdown in China’s economy will be seen outside of its boundaries given that it accounts for more than a third of global expansion.

In a statement released last month, the US credit rating firm Fitch warned that China’s downturn was “casting a shadow over global growth prospects” and revised its 2024 global growth projection downward.

Some economists, however, believe that the notion that China is the source of prosperity for the entire world has been overdone.

On September 27, 2023, a worker at a packaging plant in Lianyungang, Jiangsu Province, East China, operates a production line.
picture caption
More than a third of global growth is attributed to the Chinese economy.
Mathematically, China does indeed responsible for about 40% of world growth, according to George Magnus, an economist at the China Centre at the University of Oxford.

But from whom does such growth benefit? The trade surplus in China is enormous. Since China exports far more than it buys, how much or how little it grows really has more to do with China than it does with the rest of the world.

The demand for raw materials and commodities will decrease if China spends less on goods and services or on building homes. Comparing August to the same month last year, when zero-Covid restrictions were still in place, the nation’s imports dropped by over 9%.

The countries that will be hardest hurt by this, according to Roland Rajah, director of the Indo-Pacific Development Centre at the Lowy Institute in Sydney, include large exporters like Australia, Brazil, and numerous African nations.

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Prices in China will continue to be low due to the country’s weak demand. From the standpoint of Western consumers, it would be a welcome alternative to further hiking interest rates for containing growing costs.

“This is good news for people and businesses struggling to deal with high inflation,” adds Mr. Rajah. Therefore, regular consumers may benefit in the short run from China’s slowdown. For those living in underdeveloped nations, there are longer-term issues to consider.

China has spent more than a trillion dollars on massive infrastructure projects referred to as the Belt and Road Initiative during the past ten years.

Chinese funding and technology have been used to construct highways, airports, seaports, and bridges in more than 150 nations. Mr. Rajah says that if domestic economic issues remain, Chinese commitment to these initiatives may start to falter.

“Now Chinese firms and banks won’t have the same financial largesse to splash around overseas,” he claims.

in the world, China
It is uncertain how else China’s home economic crisis may influence its foreign policy, while a reduction in Chinese investment abroad is a possibility.

Some claim that a more exposed China would try to mend strained ties with the US. Chinese exports to the US fell by 25% in the first half of this year as a result of American trade restrictions, and US Trade Secretary Gina Raimondo recently dubbed China “uninvestable” for some American businesses.

However, there is no proof that China’s stance is changing. Beijing continues to retaliate with its own limitations, constantly criticizes the “Cold War mentality” of western nations, and seems to have positive connections with the autocratic rulers of sanctioned regimes, such as Vladimir Putin of Russia and Bashar Al-Assad of Syria.

At the same time, a steady stream of representatives from the US and EU continue to visit China each month to maintain trade negotiations. Few people actually understand the differences between Chinese rhetoric and Chinese policy, which is a fact.

Hawkish commentators in Washington have given one of the more extreme interpretations of this uncertainty, saying that a decline in the Chinese economy would have an impact on how Beijing handles Taiwan, the self-governing island that Beijing claims as its own territory.

On June 19, 2023, US Secretary of State Antony Blinken (L) and Chinese President Xi Jinping shake hands in Beijing’s Great Hall of the People.
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Earlier this year, US Secretary of State Antony Blinken (L) traveled to China for a crucial meeting with Chairman Xi Jinping.
Republican Congressman Mike Gallagher, who serves as the chair of the US House Select Committee on China, claimed earlier this month that domestic issues were making Chinese President Xi Jinping “less predictable” and would cause him to “do something very stupid” with regard to Taiwan.

The premise is that the Communist Party’s response “could prove very consequential indeed” if, as Mr. Rajah contends, it becomes clear that China’s “economic miracle is over.”

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However, a lot of people disagree with this idea, including US President Joe Biden. He said that Mr. Xi had his “hands full” right now dealing with the nation’s economic issues when questioned about this prospect.

“I don’t believe it will lead to China invading Taiwan; in fact, the reverse. China likely doesn’t have the same capacity as it did in the past, according to Mr. Biden.

Take nothing for granted
But if history has taught us anything, it’s to be prepared for the unexpected. Few people, as Ms. Elms points out, believed that Las Vegas subprime mortgages would have such a profound impact on the world economy prior to 2008.

Some analysts are concerned about “financial contagion” due to the echoes of 2008’s financial crisis. This includes the terrifying possibility that China’s real estate problem would cause the Chinese economy to completely collapse, setting off a global financial crisis.

On September 27, 2023, dozens of freighters dock in the Qingdao sector of the Shandong Pilot Free Trade Zone to load and unload cargo.
picture caption
In August, China’s exports fell for the fourth consecutive month.
It is easy to draw comparisons to the subprime mortgage crisis, which resulted in the demise of Wall Street investing powerhouse Lehman Brothers and a generalized recession. However, Mr. Magnus claims that they are not entirely correct.

He claims, “This is not going to be a shock like Lehman.” “China is unlikely to allow its major banks to fail because their balance sheets are stronger than those of the thousands of small and regional banks that failed in the US,”

The property market in China is not connected to their banking system the same way that American subprime mortgages were, according to Ms. Elms. Additionally, unlike the United States in 2008, China’s financial system is not sufficiently powerful to have a direct impact on the rest of the world.

“We are globally interconnected,” she asserts. “When one of the major engines of growth is not operating, it has an impact on the rest of us, and it frequently has an impact in unexpected ways.”

“I don’t think we’re headed for another 2008, but the point is that sometimes what seem to be small, domestic issues can affect us all,” the speaker said. even in ways that we never would have thought of.

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