China has built itself into a world power with a massive impact on the global economy through decades of steady growth, huge trade volumes, and an expanding, productive population.
After President Xi Jinping lifted Beijing’s extreme “zero-COVID” policies in December, experts expected that Chinese demand and business would come roaring back so strong that the entire world economy would feel the effects of its reopening.
But the opposite has happened, and experts say the repercussions of China’s economic stumbles could reverberate well beyond its borders.
The world’s second-largest economy looks strikingly weak coming out of the pandemic, and its troubles have ballooned to such an extent this month that Treasury Secretary Janet Yellen warned of China’s risks to the US the same week President Joe Biden likened it to a “ticking time bomb.”
Chinese officials have warned experts against painting the economy in a negative light, though the data paint a clear picture of an economy in trouble.
Tuesday data — which came less than an hour after a surprise rate cut from China’s central bank — showed China’s industrial production, retail sales, and exports all performed weaker than expected, and the report omitted youth unemployment, which had hit a record high of 21.3% in the prior month.
All this is unfolding against a backdrop of an unstable property sector, headlined most recently by a bankruptcy filing by Evergrande, the most heavily indebted property developer in the world, and Country Garden Holdings’ two missed coupon payments on its bonds.
Here’s what all this could mean for the rest of the world’s markets.
Collapsing trade
Given its major role in global trade, none of these troubles are China’s alone.
Alfredo Montufar-Helu, the head of the China Center at the Conference Board, told Insider that the country still accounts for about 30% of global growth, and any domestic slippage will have far-reaching implications on markets around the world.
“Unlike during the Great Financial Crisis, China will not drive the global economic recovery in the aftermath of the COVID-19 pandemic,” he said. “As its economy continues facing downward pressures, its growth momentum might slow down further, in turn exacerbating the already significant pressures that the global economy is facing.”
One way this is already being felt is in the softening of Chinese demand, which has led to a sharp drop in trade. This week’s data showed China’s exports have declined for three consecutive months, and imports have slipped for five months.
On the plus side, lower demand dampens inflationary pressures, which could potentially make life easier for the Federal Reserve and other central banks as they continue to battle high prices in their economies.
Yet, this can have a negative impact on producers and exporters in the US and other markets, Montufar-Helu said, and replacing the missing demand may not be easy.
Keith Hartley, chief executive of supply-chain analytics firm LevaData, noted that China consumes a significant portion of the world’s commodities, and softer demand there means an inventory glut for US companies and shrinking profits, as well as less business for countries that rely on commodity exports.
“For the US, sectors like agriculture and manufacturing reliant on exporting to China could see reduced sales, potentially causing economic slowdown and job losses,” Hartley told Insider.
While a prolonged slump for Chinese exports could weigh on nations’ manufacturing industries and disrupt supply chains, he said it also opens the door for other countries like the US to diversify their sourcing strategies, and begin relocating manufacturing outside of China.
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Exporting deflation
American companies with ties to China are already feeling the effects of the slowdown.
A handful of chemical and manufacturing companies have reported lower second-quarter sales, and some have pulled back their outlook for the rest of the year, as Insider’s Noah Sheidlower wrote Thursday.
As a result of widespread declines in China’s consumer prices, many Americans could see pricier cars and personal-care products, and some companies could lose revenue and resort to layoffs.
“One of the biggest risks is that China starts exporting deflation to the world, hurting corporate profits in the U.S. and around the world,” Dexter Roberts, a senior fellow at the Atlantic Council, told Insider.
“A Chinese slump would hurt both the many American companies that derive a significant portion of their revenues from China, and those who may not be directly invested or sell to China, but would be hurt by global deflation.”
Housing crash
Slumping domestic demand in China and weak consumer spending largely stems from risks in the domestic property market, but there are spillover risks from that sector as well.
The Conference Board’s Montufar-Helu said housing assets are estimated to account for around 70% of Chinese households’ wealth, and the uncertainty is making people hold onto their cash rather than spend it.
Property market tumult is weighing on China’s overall growth, he said, by crimping industrial output, discouraging spending, eroding government revenue levels, and increasing risks across the financial sector.
“The real estate boom over the past decade attracted considerable amounts of foreign capital, including from the US,” Montufar-Helu said. “Chinese developers are facing significant liquidity constraints, and so the likelihood of them defaulting on US-denominated bonds is growing.”
And as the housing crisis deepens, it will become harder to China to right the ship, creating a lasting drag on future global growth.
David Roche, president and global strategist at Independent Strategy, said in a CNBC interview this week that the Chinese economic model is now “washed up on the beach” with little chance of a rebound.
Global markets haven’t fully priced in the trouble in the property market, he explained.
“They really don’t have the approach to surgically get rid of bad debts and bad assets, and at the same time, they’re not going to be able to rely on their traditional measures of growth,” Roche said. “That’s the big problem.”