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Potential Impact of China’s Economic Struggles on the United States

The news about China’s economy over the past few weeks has been challenging. The country’s growth has slowed down significantly, falling from its usual 8 percent annual pace to around 3 percent. Real estate companies are collapsing after a decade of overbuilding, and China’s citizens, frustrated by lengthy lockdowns and lacking confidence in the government, have not been able to boost the country’s economy through consumption.

At the moment, the impact of China’s struggles on the United States is likely to be minor. China has a limited role as a customer for American goods, and there are minimal connections between the financial systems of both countries. According to a simulation conducted by Wells Fargo, even in a “hard landing” scenario for China where output would be significantly lower than previous growth rates, the US economy’s growth would only be affected by 0.1 percent in 2024 and 0.2 percent in 2025.

However, if China’s economic difficulties worsen and have a significant impact on the global economy, the situation could change. Neil Shearing, the chief economist at Capital Economics Group, believes that China’s current struggles are not a major factor in determining the United States’ economic outlook in the next six months, unless the situation in China substantially worsens.

The United States has played a role in China’s economic troubles. American consumption during the pandemic pulled in a significant amount of imports from China, but this demand has decreased as Americans now spend their money on different goods and experiences. Additionally, former President Donald J. Trump’s tariffs on Chinese goods have weakened Chinese factories even further.

China’s leaders have expressed a desire for increased reliance on domestic consumption to drive economic growth. However, they have taken few steps to support domestic consumption, such as bolstering safety net programs, which would encourage residents to spend more of their savings.

There is concern that China may revert to encouraging exports to foster growth, especially since the Chinese currency, the renminbi, is weak against the dollar. An export surge could lower prices for consumer goods and help lower inflation in the United States. However, it could also hinder efforts to revive American manufacturing.

The volume of goods flowing from the United States to China is not significant. China accounted for only 7.5 percent of US exports in 2022. Although American businesses have sought to expand the Chinese market, particularly for agricultural products, such efforts have been disappointing. Targets set in the 2018 agreement between China and the Trump administration to buy more US agricultural products were never met.

The impact of China’s economic struggles on American companies and industries may be limited. Tesla’s sales in China have declined due to tough competition from local brands. Apple, which generates about 20 percent of its revenue in China, may also face challenges as residents opt for cheaper alternatives. American banks doing global business have observed slowing growth, and Chinese tourists, who contribute to local economies when they visit, may reduce their spending.

However, the financial and economic spillovers from China’s struggles are likely to be contained. The US and Chinese banking systems are separate enough to insulate American institutions and investors. Any impact on the bond market caused by China is expected to be offset by the US Federal Reserve.

There may even be some potential benefits for American companies if Chinese investors, lacking domestic opportunities, redirect their investments to the United States. However, China’s direct investment in US assets is relatively low and could face obstacles as states seek to limit Chinese purchases of US real estate and businesses.

The geopolitical implications of China’s economic condition are also worth considering. A weakening Chinese economy could lead to a shift in geopolitical dynamics and American interests. Countries that took loans from China for infrastructure projects may turn back to international lending institutions like the World Bank. China’s attractiveness in terms of trade agreements and market access may also decrease.

The outlook for China’s economy remains uncertain. While there are concerns about its economic structure, it is premature to consider China on the brink of prolonged stagnation like Japan experienced. Some experts believe that the Chinese government is agile and will respond to potential crises.

In conclusion, while China’s economic struggles may have minor implications for the United States at present, the situation could change if China’s economy worsens or has significant global ramifications. However, the impact on American institutions, investors, and industries is likely to be limited, thanks to the separate financial systems and potential insulation measures.

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