April 24, 2024
Economy

What China’s struggling economy means for the US, global economy


China’s consumer prices declined for a fourth straight month in January, while producer prices also dropped, underlining the serious economic challenges facing the world’s second-biggest economy as it struggles to recover after the COVID-19 pandemic and related restrictions. 

The consumer price index (CPI) fell 0.8% in January, more than the 0.5% prediction from a poll by Reuters, after a 0.3% drop in December 2023, data from the National Bureau of Statistics (NBS) showed. The decline is China’s biggest drop since 2009.

According to Bloomberg, this increases the risk that deflation will last through the first half of the year.

China is one of the United States’ most important trading partners, but trade between the two countries has been unstable. In 2023, China’s overall exports declined by 4.6% to $3.38 trillion, according to data released by China’s customs office. Exports to the U.S. led the decline, down 13% from the previous year. For the first three quarters of 2023, China’s exports to the U.S. fell by 16.4%, while imports dropped by 6%.

China’s foreign trade has been hit by a significant decline in global demand, and recovery has stalled since China lifted COVID-19 restrictions. Demand for China’s goods has also been affected by central banks elsewhere around the world raising interest rates to combat persistent price inflation. 

China’s economy has been one of the fastest-growing in the world in the last four decades, with annual growth rates often above 10%. However, in the past year, China’s economy has been facing a sharp slowdown, with GDP growing by 5.2%  in 2023, an increase from 4.9% in the third quarter of 2023, but missing a 5.3% forecast in a Reuters poll.

To be sure, the International Monetary Fund (IMF) forecasts China will be the top contributor to global growth over the next five years, with a share expected to represent 22.6% of total world growth — double that of the U.S. The IMF also projected that China will contribute to about 34.9% of global growth this year. 

The problems 

Economists have said China is facing several challenges: youth unemployment is rising, consumer prices are falling, a real estate crisis is deepening, and foreign investors are worried. 

Julian Evans-Pritchard of Capital Economics told the Associated Press that exports may fall further still. 

“We expect exports to decline over the coming months before bottoming around the middle of next year [2024]. Measures of foreign orders hint at a more significant drop in foreign demand than what has, so far, been observed in the customs data,” he said in a report.

Richard Hornik, Adjunct Senior Fellow at the East-West Center, said China’s growth had begun to slow long before COVID-19. He said there has been a collapse in property prices, which is particularly painful for President Xi Jinping and the Chinese leadership. 

“Starting about 20 years ago, real estate became one of the most important ways that the Chinese Communist Party shared the wealth generated in the economy with average citizens. For most people, their property ownership is their primary financial asset,” Hornik said. 

He said the financial crisis of 2008 was the beginning of China’s economic growth after it replaced its exports with more domestic consumption and shifted its investment into real estate and infrastructure. 

Economic analyst Martin Ademmer said weak demand contributed the most to the slide in inflation over the course of 2023 in China and the drop into outright deflation in the second half.

T.S. Lombard, an independent economic and investment strategy researcher, said China’s economy will struggle through 2024.

“This loss of confidence underpins the economic condition, which has made it difficult to relaunch the economy, and something that James King of the Financial Times called a psycho-political funk,” said Hornik. 

Hornik said he would not necessarily blame China’s President Xi Jinping for the current economic woes but also blamed his predecessor Hu In, who he said created unfavorable policies and their refusal to deal with the real estate bubble, excessive infrastructure spending, and ballooning debt. 

He compares China’s current economic turmoil to what Japan experienced two decades ago. 

“Certainly, the parallels are stunning. We have had excessive infrastructure standing, spending, and an enormous public debt overhang. All of those made it very difficult,” he said. 

Hornik said it might take three to five years for China’s economy to regain its stability. It took Japan almost 20 years to restart the kind of growth that we had expected to see from it in the previous 30 years.”

Eric Zhu, an economist covering China for Bloomberg, said China’s economy needs aggressive policy steps to boost demand and shake confidence out of its torpor. 

Some analysts, including the IMF, have projected that China’s economic struggle will affect the U.S. and the global economy. 

The IMF trimmed its 2023 growth forecast for China’s economy from 5.2% to 5% in its October update of its World Economic Outlook. The IMF also dropped its 2024 forecast from 4.5% to 4.2%. 

Slower growth in China is an “important risk for the global economy,” the report said. 



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