The Looming Threat: China’s Ailing Economy and its Impact on the US

China‘s Ailing Economy and its Potential Impact on the US

August 21, 2023

The slowdown of China‘s economy has become a cause for concern not only within the country but also for American companies. With projections indicating that China is likely to miss its 5% growth target this year, the impact is already being felt by large US companies with significant business ties to China, particularly in the construction and manufacturing sectors. Furthermore, China is facing a record high youth unemployment rate of over 21% and a burst property market bubble, adding to its economic woes.

Facing the Slowdown: China‘s Response

In response to the economic downturn, China has taken action by surprising markets with interest rate cuts. However, economists have expressed skepticism that these cuts alone will make a meaningful difference. Some experts have warned that deeper cuts run the risk of currency depreciation, further complicating the economic situation.

There are also concerns that China‘s shift in priorities away from economic growth towards military ambitions and national defense could be exacerbating the economic slowdown. This shift has been attributed to President Xi Jinping’s increased emphasis on total political and ideological control. Gabriel Wildau, the managing director at consulting firm Teneo, warns that a lackluster response to the housing market crisis shows that the reduced emphasis on economic growth is more significant than previously anticipated.

Philosophical and Political Factors at Play

China‘s philosophy of total “ideological control” has been criticized as a contributing factor to its economic troubles. Erin Walsh, a senior research fellow at the Heritage Foundation’s Asian Studies Center, argues that the country’s prioritization of power over growth is hindering its ability to effectively address the economic downturn. The tight control exerted by the Chinese Communist Party under President Xi Jinping’s leadership is seen as a hindrance to economic stability.

Moreover, Walsh points out that China‘s economic decline can be traced back to political missteps, including its response to the COVID-19 pandemic and the ongoing trade war with the United States. These factors have not only worsened China‘s economic situation but also increased tensions within the country.

Implications for American Companies

American companies heavily reliant on the Chinese market are advised to consider diversifying their markets. Walsh warns that the risks faced by these companies go beyond short-term earnings, with potential conflicts, such as the possibility of war with Taiwan, and the implementation of new laws impacting US businesses in China. The impact of these challenges may extend beyond China, affecting countries that rely on trade with China, such as those in Western Europe.

The Resilience of the US Economy

While the struggles of China‘s economy may have negative repercussions for global trade, it is unlikely to cause extensive damage to the US economy. Despite the interconnectedness of the global economy, the United States is considered the largest and most resilient economy in the world. Nevertheless, other countries that rely heavily on trade with China may experience economic contagion.

It is important for American companies to monitor the situation and plan for potential disruptions in the Chinese market. Diversification and contingency plans are crucial to mitigate risks and ensure business continuity in an increasingly uncertain global economic environment.

Overall, the slowdown in China‘s economy serves as a reminder of the fragility of global economic stability and the interconnectedness of the world’s major economies. Governments and businesses alike must navigate through these challenges with foresight and adaptability to safeguard their interests and minimize the potential negative impacts.