China’s economy was meant to drive a third of global economic growth this year, so one can feel the impact of its dramatic slowdown in recent months and is sounding alarm bells across the world. For the first time in decades, the world’s second economy is itself in trouble.
Policymakers are bracing for a hit to their economies as China’s imports of everything from construction materials to electronics slide. Caterpillar Inc. says Chinese demand for machines used on building sites is worse than previously thought. U.S. President Joe Biden called the economic problems a “ticking time bomb.”
Reasons for China’s Economic Slowdown
The issue is that, after a rapid spurt of activity earlier this year following the lifting of COVID lockdowns, growth is stalling. Consumer prices are falling, a real estate crisis is deepening and exports are in a slump. Unemployment among youth has gotten so bad the government has stopped publishing the data.
A major homebuilder and a prominent investment company in China have missed payments to their investors in recent weeks, rekindling fears that the ongoing deterioration of the housing market could lead to heightened risks to financial stability.
A lack of resolute measures to stimulate domestic demand and fears of contagion have triggered a new round of growth downgrades, with several major investment banks cutting their forecasts of China’s economic growth to below five per cent as per report.
China’s economic slowdown impact
China’s economic slowdown impact can be felt with global investors already pulling more than $10 billion from it’s stock markets, with most of the selling in blue chips. Goldman Sachs Group Inc. and Morgan Stanley have cut their targets for Chinese equities, with the former also warning of spillover risks to the rest of the region.
It’s not all doom-and-gloom, though. China’s economic slowdown will drag down global oil prices, and deflation in the country means the prices of goods being shipped around the world are falling. That’s a benefit to countries like the U.S. and U.K. still battling high inflation.
China’s economic slowdown impact will be positive for some emerging markets like India as they also see opportunities, hoping to attract the foreign investment that may be leaving China’s shores.
But a prolonged slowdown will surely impact China by hurting it, rather than help, the rest of the world. When China’s growth rate rises by 1 percentage point, global expansion is boosted by about 0.3 percentage points.
Ripple Effect on Global Economy
China’s economic slowdown “isn’t such a bad thing” for the global economy, Peter Berezin, chief global strategist BCA Research Inc., said in an interview on Bloomberg TV. “But, if the rest of the world, the U.S. and Europe, falls into recession, if China remains weak, then that would be a problem not just for China but for the whole global economy.”
Here’s a look at how China’s slowdown is rippling across economies and financial markets.
Collapse of trade
Many countries, especially those in Asia, count China as their biggest export market for everything from electronic parts and food to metals and energy.
The value of Chinese imports has fallen for nine of the last 10 months as demand retreats from the record highs set during the pandemic.
So far, the actual volume of commodities such as iron or copper ore sent to China has held up. But if China’s economic slowdown slowdown continues, shipments could be impacted, which would affect miners in Australia, South America and elsewhere around the world.’
Pressure of deflation
China’s economic slowdown has impacted the cost of goods that are falling for the past 10 months. That’s welcome news for people around the globe still struggling with high inflation.
The price of Chinese goods at U.S. docks has fallen every month this year and that is likely to continue until factory prices in China return to positive territory.
Slowdown in tourism
Impact of China’s economic slowdown can be felt on spending too. Chinese consumers are spending more on services, like travel and tourism, than on goods but they’re not yet venturing overseas in large numbers.
The pandemic and weak economy have curbed incomes in China. That suggests it may take a long time for overseas travel to rebound to the levels they were at before the pandemic, hitting tourism-dependent nations in Southeast Asia such as Thailand.
China’s economic slowdown impact on currency
China economic slowdown has impacted its currency too. China’s economic slowdown have pushed the currency down more than 5% against the dollar this year, with the yuan close to breaching the 7.3 mark this month.
The depreciation in the offshore yuan is having a greater impact on its peers in Asia, Latin America and the Central and Eastern Europe bloc, as per data with the correlation of the Chinese currency to some others rising.
The weak sentiment spillover may weigh on currencies like the Singapore dollar, Thai baht, and Mexican peso as correlations rise, according to Barclays Bank Plc.
The Australian dollar, which often trades as a proxy for China, has lost more than 3% this quarter, the worst performer in the Group-of-10 basket.
