The Chinese economy is faltering. Here’s how its problems can spill over into global markets.

The Chinese economy is faltering.  Here's how its problems can spill over into global markets.
China's economy is faltering, and its problems could spill over into the rest of the world

China’s economy is faltering, and experts warn its problems could affect global growth and business.Lintao Zhang/Getty Staff

  • The Chinese economy is facing headwinds ranging from property market instability to weak consumer demand.

  • Experts told Insider that the deteriorating scenario in China does not bode well for global markets and other economies such as the United States.

  • Both Janet Yellen and Joe Biden recently warned about China’s indirect dangers.

China has built itself into a global power with enormous influence on the global economy through decades of steady growth, huge trade volumes, and a growing productive population.

after President Xi Jinping Beijing lifted its extreme “no coronavirus” policies in December, and experts predicted that Chinese demand and business would return so strong that the effects of reopening would be felt by the entire global economy.

But the opposite has happened, and experts say the fallout from China’s economic stumbles could reverberate far beyond its borders.

the The world’s second largest economy looks strikingly weak after emerging from the pandemicIts problems have swelled to such an extent this month that Treasury Secretary Janet Yellen warned against China risks to the United States Same week as the boss Joe Biden He likened it to a “time bomb”.

Chinese officials Experts cautioned against portraying the economy in a negative lightthough the data paints a clear picture of an economy in trouble.

Tuesday data – Which came less than an hour after a Sudden rate cut From China’s central bank – Showing that China’s industrial production, retail sales and exports performed weaker than expected, the report omitted youth unemployment, which hit A record high of 21.3% in the previous month.

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All of this is unfolding against the backdrop of an unstable real estate sector, which has recently been headlined by A.J bankruptcy of Evergrandethe world’s most indebted real estate developer, and Country Garden Holdings’ She missed two coupon payments on her bond.

Here’s what all this could mean for the rest of the world’s markets.

Trade collapse

Given its major role in global trade, none of these problems relate to China alone.

The country still accounts for about 30% of global growth, and any domestic slippage would have far-reaching implications for markets around the world, Alfredo Montovar-Helu, head of the China Center at the Conference Board, told Insider.

“Unlike 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 to experience downward pressure, growth momentum may slow further, which in turn will exacerbate the already significant pressures the global economy is facing.”

One way that is already being felt is the softening of Chinese demand, which has led to a sharp decline in trade. This week’s data showed that China’s exports have declined for three consecutive months, and imports have declined for five months.

On the plus side, lower demand mitigate inflationary pressures, which could make life easier for the Federal Reserve and other central banks as they continue to battle higher prices in their economies.

However, this could have a negative impact on producers and exporters in the United States and other markets, Montovar-Helou says, and replacing lost demand may not be easy.

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Keith Hartley, CEO of supply chain analysis firm LevaData, pointed out that China consumes a large portion of the world’s goods, and weak demand there means an inventory glut for US companies and shrinking profits, as well as less business for countries that depend on commodity exports.

“For the United States, sectors such as agriculture and manufacturing that depend on exporting to China could see sales decline, which could cause an economic slowdown and job losses,” Hartley told Insider.

While a prolonged slump in Chinese exports could burden countries’ manufacturing industries and disrupt supply chains, he said it also opens the door for other countries such as the United States to diversify their supply strategies, and begin to move manufacturing out of China.

export contraction

American companies with ties to China are already feeling the effects of the slowdown.

A few chemical and manufacturing companies reported lower second-quarter sales, and some did Retract their view For the rest of the year, Insider’s Noah Schedlor wrote on Thursday.

As a result of widespread drops in consumer prices in China, many Americans could see expensive 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 earnings in the US and around the world,” Dexter Roberts, a senior fellow at the Atlantic Council, told Insider.

“A Chinese recession will hurt many American companies that get a large portion of their revenue from China, and those that may not invest or sell directly to China, but will be hurt by the global downturn.”

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Housing crash

Slumping domestic demand in China and weaker consumer spending stem largely from risks in the domestic real estate market, but there are spillover risks from this sector as well.

Residential assets are estimated to account for about 70% of the wealth of Chinese households, and the uncertainty makes people keep their money rather than spend it, Montovar Helou of the Conference Board said.

He said the real estate market turmoil was weighing on China’s overall growth, by curtailing industrial output, discouraging spending, eroding government revenue levels and increasing risks across the financial sector.

“The real estate boom over the past decade has attracted large amounts of foreign capital, including from the United States,” Montovar-Helou said. “Chinese developers face significant liquidity constraints, so the probability of them defaulting on US-denominated bonds is increasing.”

As the housing crisis worsens, it will become more difficult for China to rectify the situation, creating a permanent drag on global growth in the future.

David Roche, president and global strategist at Independent Strategy, said in an interview with CNBC this week that China’s economic model is now “washed ashore” With little chance of rebound.

He explained that global markets have not fully absorbed the troubles in the real estate market.

“They don’t really have an approach to surgically eliminate bad debt 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. “This is the big problem.”

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