Image for Chinese Economic Woes Not Likely a Crisis
China's economy has hit road bumps causing concern it could adversely affect the U.S. and global economies.

Impact on U.S. Slim as China’s Recovery May Have Already Begun

China’s economy has hit a rough patch with a slumping property market, causing some economists to worry Chinese economic woes could impact the U.S. economy. Paul Krugman isn’t one of them.

Krugman acknowledges China’s economic problems are real. But he doesn’t believe China’s problems will have a negative effect on the U.S. economy. He thinks they might help bring down U.S. inflation.

In a column in The New York Times, Krugman says the foundering real estate market in China will mostly affect China. “China is saddled with huge debt burdens, but most of it is owed to itself,” Krugman says.

U.S. imports from China totaled $150 billion in 2022, less than 1 percent of U.S. GDP, according to Krugman, who noted Germany and Japan could face greater economic risk from declining Chinese imports. “In fact, an economic crisis in China could slightly benefit the U.S., if reduced demand for commodities helps ease prices and inflation,” Krugman wrote.

The greater risk, Krugman speculates, is whether Chinese leaders would try to deflect attention  from an economic downturn through military adventurism.

Other economists note the widening gulf between China and the United States could restrict investment and trade, prompting Chinese President Xi Jinping to explore a stronger alliance with the BRICS coalition of Brazil, Russia, China, India and South Africa. China and Russia, for separate but related reasons, are eager to expand the BRICS coalition. Forty countries have expressed an interest in joining.

Many economists think China faces long-term economic problems in part because of the tight grip on policy by an insular Chinese Communist Party. They point to the clumsy way the Party responded to the Covid pandemic by shutting down entire cities and its own policy of tightening property investment practices, which exposed large property developers.

Significant Economic Challenges
Chinese challenges, economists conclude, are substantial and include “slumping productivity, an aging labor force, restrictions on the transfer of technology imposed by the United States and other countries, an ongoing real estate bubble’s correction, elevated unemployment among younger workers, and a leadership that seems to prioritize party control and national security over economic growth”.

Despite those challenges, there is an economist consensus that China’s isn’t in the grip of a severe cyclical downward spiral that could persist for years. Here is their evidence:

  • Imports in the first half of 2023 have increased signaling continuing domestic demand.
  • In the same period, per capita consumption expanded 8.4 percent as Chinese consumers dipped into savings accrued during the pandemic.
  • Average wages in the first half of 2023 grew 6.8 percent.
  • So far, there has been little evidence of deflation – or the fear of deflation.
  • Investment has sharply slumped but there are indications a recovery has begun.

Tao Wang, managing director and chief China economist at UBS in Hong Kong, told NPR the Chinese economy began to recover earlier this year, but stumbled in the second quarter. The former economist at the International Monetary Fund explained, “Property recovery faltered, with [housing] sales and starts falling much further. In addition, as local governments faced financing challenges, they tightened fiscal spending, which also constrained growth. Against this backdrop, the industrial sector started to destock and consumption recovery slowed in the second quarter. As a result, overall economic growth slumped in the second quarter.”

In response to the slump, Wang reported, “At the Politburo meeting in late July, China’s senior leadership recognized the difficulties facing the economy and vowed to roll out more supportive policies to help stabilize the economy. We expect an easing of fiscal policy with more credit support for infrastructure investment and modest easing of property policies. Our baseline forecast is quarter-on-quarter growth recovering to 4-4.5% in the third and fourth quarter, resulting in annual GDP growth reaching about 5% this year.”

Deep Property Slump
“Some parts of the corporate sector, especially the property developers, are also now facing severe challenges to service their debt given the deep property slump,” Wang described. “Despite the high and rising debt level, we think the risk of a ‘typical’ debt crisis or financial crisis where large defaults cause bank failures, severe credit crunch and/or sharp exchange rate depreciation is relatively small in China.”

“One factor is that China’s government has substantial assets that can be disposed of to help pay debt,” Wang said. “More importantly, a debt crisis is typically a liquidity crisis, and in the case of China, high domestic saving kept by capital controls at domestic banks means that more than 95% of China’s debt is domestic debt, financed by relatively stable domestic deposits and not subject to sentiment change of international investors.”