Chinese Economic Crisis Has ‘Mostly Limited’ yet ‘Meaningful’ Effect on US, Experts Say

A Chinese bank worker prepares to count U.S. dollar bills and a stack of 100 yuan notes at a bank in Hefei, Anhui Province, China, on March 9, 2010. (STR/AFP via Getty Images)

Murphy’s Law seems to be playing out for China’s economy: Anything that can go wrong will go wrong.

For the past five months, a string of bad news has exposed structural issues of solvency among real estate developers and local governments tied down by an ailing property sector that has grown to be more than a quarter of China’s gross domestic product (GDP). Exports, the other growth engine for the Chinese economy, have also seen an accelerating year-on-year decline since March.

In addition, experts say China’s aging population and low consumer confidence point to a decade of economic stagnation, with a real risk of a growth rate barely above zero.

How much will a Chinese economic slowdown affect the United States? The consensus of experts is that the impact is limited.

“The global repercussions of China’s economic travails are mostly limited but still remarkable,” George Magnus, an associate at Oxford University’s China Center and a former chief economist at UBS, told The Epoch Times in an email.

“Limited, because I don’t see financial market contagion coming from China unless Beijing lets the yuan sink like a stone, which it won’t.”

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He said that the world’s exposure to Chinese real estate isn’t significant, other than for commodity exporters.

China’s slowdown will mainly affect the United States through exchange rates, said Brad Setser, a senior fellow at the Council of Foreign Relations.

He estimates that a 10 percent depreciation of the yuan, or a 10 percent decrease in the real exchange rate—a net effect of nominal exchange rate and price differences between two currencies—to the U.S. dollar, will drag down U.S. GDP by 0.5 percent.

For reference, the real exchange rate of the yuan depreciated by about 8 percent from January to July, according to the Bank for International Settlements, known as the central bank for central banks.

“My conclusion is that if China keeps its currency stable and recovers through domestic demand, the impact on the U.S. is modest,” Mr. Setser told The Epoch Times. “If China recovers through exports and depreciates [the yuan] significantly, I think there’s a meaningful drag.”

A remarkable aspect is that a weaker Chinese economy subtracts from global economic growth because of lower imports and potentially “greater international relations truculence” by the Chinese regime, leading to “heightened global tensions over Taiwan or the South China Sea,” according to Mr. Magnus.

Cargo ships loaded with containers berth at the Yantian terminal in Shenzhen, in China's Guangdong Province, on Dec. 25, 2022. (STR/AFP via Getty Images)

Limited Impact

The channels of a Chinese economic impact are from the overlapping areas of two economies: the financial market, and imports and exports.

Economist Paul Krugman estimates the total U.S. direct and portfolio investment in China at slightly more than $500 billion. He compares that number to the U.S. office buildings valued at about five times as much—at $2.6 trillion—to illustrate the scale of U.S. exposure to a potential Chinese economic crisis as being “surprisingly small.”

The overall effect on exports is also modest.

The U.S. exposure to China’s real estate market is little because it doesn’t export a lot of copper, iron ore, or other commodities to Chinese construction firms.

In 2022, U.S. exports to China totaled $153.8 billion, about 7.5 percent of the total $2.1 trillion in U.S. exports to the world, according to the Commerce Department’s Bureau of Industry and Security. The same document reported U.S. copper, iron, and steel exports to China at about $4.5 billion—or 3 percent of the total exports to China— in 2022.

However, the repercussions of China’s weakened demand will be felt by U.S. agricultural exporters, especially farmers of soybeans, which at $16.4 billion accounted for nearly half of the U.S. agricultural exports to China in 2022.

“The economy as a whole doesn’t export that much to China,” Mr. Setser said, noting that the story differs only for a few particular sectors. “So if you do a standard estimate of the impact between a China that grows at 5 percent and a China that doesn’t grow, you don’t get a really big aggregate impact on U.S. exports.”

He said that China’s banks don’t borrow much from the world; they mainly raise and lend money inside China. Therefore, “losses in China’s banks are an issue for China, not the world,” Mr. Setser wrote on X, formerly known as Twitter.

Countering US Inflation

China’s slowing growth means lower import costs and consumer goods prices for the United States.

The Chinese Producer Price Index (PPI)—an inflation measure from the perspective of producers—tends to be a leading indicator for the same index in the United States, Edward Yardeni, president of global investment consultancy Yardeni Research, said.

In July, China officially slid into deflation with a negative year-on-year consumer price index (CPI), and the PPI showed year-on-year declines for the 10th consecutive month.

“If China has deflation, then that may allow us to have inflation come down without a recession in the United States,” Mr. Yardeni told The Epoch Times. Some of the effects have shown up in reduced U.S. retail prices and PPI prices, he said.

The U.S. core inflation, which is the overall CPI not including food and energy, has dropped to 4.7 percent in July from 6.6 percent in September 2022. The PPI for goods, excluding services, has come down from its height of 1.3 percent in January to 0.1 percent in July, with prices dropping in three of the months in between.

“So in that sense, you know, the pain in China’s economy is a gain for the U.S. economy, in the sense that we don’t need to have a recession to have inflation come down,” Mr. Yardeni said.

Supply Chain Implications

Lower import costs from China may lead to more reliance on China, Mr. Setser said. They mitigate the effect that the Inflation Reduction Act is trying to have in reducing U.S. dependence on China in specific sectors.

“A weaker Chinese currency encourages the U.S. to rely more on Chinese supply, directly and indirectly, in all the sectors that don’t benefit from the specific provisions of the Inflation Reduction Act,” he said.

Even though U.S. imports from China fell to 16.5 percent—at $536.8 billion—in 2022 from 21.6 percent of total imports in 2016, the United States still sources indirectly from China via other parts of the world.

Therefore, to Mr. Setser, unlike a Chinese economic slowdown, a U.S.–China decoupling is still a shock beyond normal adjustments for the U.S. economy.

However, Christopher Balding, an expert on the Chinese economy at the UK-based think tank Henry Jackson Society, thinks that a limited impact of China’s slowdown on the U.S. economy indicates that a U.S.–China decoupling isn’t going to be disastrous.

“I am not saying it would be painless or no adjustments needed, but it’s not at all the major, earth-shattering event many have described,” he told The Epoch Times. “Yes, a slowdown and decoupling are different issues. But if [a] slowdown will have very little impact, then decoupling would have minimal impact.”

In his view, the goods that the United States imports from China are either those that can be easily sourced from other countries—for example, T-shirts—or those that need to move at least partially to other countries, such as semiconductors and electronics.

As to the reason that some people have the impression that a U.S.–China decoupling will be earth-shattering, Mr. Balding said it might be that such people wanted to be chosen to be rich by the Chinese Communist Party (CCP).

“The CCP does a great job of giving everyone just enough candy so they always want more and always think that China will reform and let them in even though they never do, so everyone keeps expecting it,” he said.

“But the reality is the U.S. and Chinese economies really aren’t intertwined enough to cause major issues if China has economic problems.”