“We’ve never seen anything like this before, and we don’t know what’s going to happen,” Kenneth Rogoff, a Harvard professor and former chief economist at the International Monetary Fund, told POLITICO.
The prospect of a prolonged crisis in the world’s second-largest economy poses a serious threat to global growth At a time when central bank policymakers are still reeling from the pandemic, rising inflation and rising geopolitical tensions. While its short-term impact on the U.S. economy will be minimal — that’s more or less the consensus now — the long-term effects will affect everything from credit markets to global supply chains.
China’s problems ‘must be mirrored in US’
The slowdown in China’s economy “cannot be simply ignored,” said Josh Lipsky, a former US State Department and International Monetary Fund official who is now director of geoeconomics at the Atlantic Council. According to him, China has transformed global trade relations – among other things. Global supply chains. By making the world dependent on itself, Beijing has ensured that its problems now spill over into many countries.
China’s problems began to pile up after Xi Jinping unexpectedly lifted his strict Covid-19 policy.
The economy suddenly reopened at the end of 2022, fueling hopes of a rebound. However, already in late spring Serious problems began to appear in the Chinese real estate industry, one of the most important branches of the Chinese economy.
Companies were no longer solvent, youth unemployment rose, and commodity prices plummeted. All this adds to fears that the Chinese crisis could soon spread beyond the country’s borders.
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Kristalina Georgieva, managing director of the International Monetary Fund, met with top Chinese officials late last week to discuss measures to save China’s economy. The agreed strategy includes fresh interest rate cuts and tax breaks to boost demand.
However, the effect of these maneuvers will be fully felt only after some time. Julian Evans-Pritchard, head of Capital Economics, a British think tank that operates in China, said “the recovery of the Chinese economy will be modest.”
The reason is that China’s problems are structural and run deeper than the current economic situation.
Beijing’s problems will be particularly painful for emerging markets that rely on Chinese goods for both imports and exports.
“The problems in Asia must have some impact on America,” said Julian Evans-Pritchard.
Washington is the most feared scenario
US Treasury Secretary Janet Yellen also took note of the fact that China’s economic slowdown could affect the US.
US Treasury Secretary Janet Yellen and US President Joe Biden
But as six leading economists and Wall Street executives point out, the links between the US and Chinese financial systems are minimal.
Although China is a major U.S. trading partner, any weakness in demand for U.S. exports would have little impact on the U.S. economy. Some also argue that China’s weakening demand for goods and raw materials will help reduce inflation in the US.
But a former U.S. Treasury and International Monetary Fund official said if China’s manufacturing sector shrinks, it could disrupt supply chains that have helped keep global prices low for decades.
Although many companies are moving out of China to reduce the risk to their supply chains in the event of potential conflicts, this is generally not an easy or quick process.
– China is still the most important market. Over the last few decades we have developed very sophisticated supply chains. “It’s not going to be easy for us to disappear,” said Chad Moudre, chief economist at the National Association of Manufacturers.
China’s sudden turn toward authoritarianism and Beijing’s crackdown on unrest, coupled with increasing international aggression that subordinates economic goals to geopolitical challenges, is a situation we should be very concerned about,” said Talib Singh, the architect of the sanctions policy. Biden directed toward Russia.
Still, for now, most experts believe the direct impact of China’s problems on the U.S. is minimal.
