The world’s second-largest economy, home to more than 1.4 billion people, is facing a host of challenges – including slow growth, high youth unemployment and a chaotic property market.
The BBC server took a deeper look at the Chinese economy and recalled, for example, that the chairman of the heavily indebted real estate giant Evergrande was being investigated by the police and that trading in the company’s shares had been suspended. But while these issues pose a big problem for Beijing, how much do they matter to the rest of the world?
Analysts interviewed by the BBC believe that fears of an impending global catastrophe are exaggerated. However, multinational companies, their employees, and even people without direct ties to China are likely to feel at least some of the effects. Ultimately, what matters most is who you are.
The winners and losers of not going to lunch
“If, for example, the Chinese start cutting back on lunch, will that affect the global economy?” asks Deborah Elms, executive director of the Asia Trade Center in Singapore.
“The answer is: Not as much as you might imagine, but it will certainly affect companies that are directly dependent on domestic Chinese consumption.”
Hundreds of major global companies such as Apple, Volkswagen and Burberry derive much of their revenue from China’s huge consumer market and will be hit by lower spending by households. The side effects will then be felt by thousands of suppliers and workers around the world who depend on these companies.
Considering that China is responsible for more than a third of global growth, any slowdown will be felt beyond its borders.
US ratings agency Fitch said last month that slowing Chinese growth was “casting a shadow over global growth prospects” and cut its forecast for the whole world to 2024.
However, according to some economists, the idea that China is the engine of global prosperity is exaggerated. “Mathematically, yes, China accounts for roughly 40% of global growth,” George Magnus, an economist at Oxford University’s China Centre, told the BBC.
“But who benefits from this growth? China has a huge trade surplus. They export a lot more than they import, so how much China grows or doesn’t grow is really about China rather than the rest of the world.”
However, the fact that China spends less on goods and services, or on building houses, means less demand for raw materials and commodities. In August, the country imported almost 9% less compared to the same period last year – when strict restrictions due to the covid pandemic were still in place.
“Big exporters like Australia, Brazil and several countries in Africa will be hit the hardest,” says Roland Rajah, director of the Indo-Pacific Development Center at the Lowy Institute in Sydney.
Lane and trail in danger
Weak demand in China also means prices there will remain low. From the point of view of Western consumers, this would be a welcome way to limit rising prices that would not involve further increases in interest rates.
“This is good news for people and businesses who are struggling with high inflation,” says Rajah. So, in the short term, ordinary consumers may benefit from a slowdown in China’s economy. However, longer-term questions arise for people in the developing world.
Over the past 10 years, China is estimated to have invested more than a trillion dollars in massive infrastructure projects known as the Belt and Road Initiative.
More than 150 countries have thus received Chinese money and technology to build roads, airports, seaports and bridges. According to Rajah, China’s commitment to these projects may begin to suffer if economic problems persist at home.
“Now Chinese companies and banks will no longer have the kind of financial stock they can throw around abroad,” he says.
China in the world
While a reduction in Chinese investment abroad is likely, how else China’s domestic economic situation will affect its foreign policy is not yet clear.
Some experts say a more vulnerable China may seek to repair damaged relations with the US. American trade restrictions also contributed to the 25% drop in Chinese exports to the US in the first half of this year. And US Commerce Secretary Gina Raimondo recently called the country “non-investable” for some US firms.
Yet Beijing continues to retaliate against the West, often lambasting its “Cold War mentality” and appearing to maintain good relations with authoritarian leaders of sanctioned regimes such as Russia’s Vladimir Putin and Syria’s Bashar Assad.
But at the same time, a stream of US and EU officials travel to China every month to continue negotiations on bilateral trade. The truth is that few people really know what lies “in the gap” between Chinese rhetoric and Chinese politics, the BBC claims.
One of the more extreme interpretations of this uncertainty comes from hawks in Washington, who argue that China’s economic downturn could affect attitudes toward Taiwan, a self-governing island that Beijing claims as its territory.
Republican Congressman Mike Gallagher, chairman of the US House China Committee, said in a speech earlier this month that domestic problems make Chinese leader Xi Jinping “less predictable” and could do “something very stupid.” precisely in relation to Taiwan.
The point is that if it turns out, as Rajah claims, that China’s “economic miracle is over,” then the Communist Party’s response “could turn out to be very consequential indeed.”
However, there are many who reject this notion, including US President Joe Biden. Asked about the possibility, the BBC said Chinese leader Xi currently has “his hands full” dealing with the country’s economic problems. “I don’t think it will cause China to invade Taiwan, quite the opposite. China probably doesn’t have the same capacity as before,” Biden said.
Expect the unexpected
However, if we can learn anything from history, it is to expect the unexpected. As Deborah Elms, managing director of the Asian Business Center in Singapore, points out, before 2008, few expected that subprime mortgages in Las Vegas would cause upheaval in the global economy.
The reverberations of 2008 caused some analysts to worry about the so-called financial contagion. This includes the nightmare that the crisis in the Chinese real estate market would lead to a complete collapse of the Chinese economy, which would trigger a financial collapse around the world.
“This will not be a Lehman shock,” he told the BBC. “China is unlikely to let its big banks fail, and they have stronger balance sheets than the thousands of regional and community banks that have failed in the US.”
Elmsová also agrees with this. “China’s real estate market is not tied to their financial infrastructure in the same way that US subprime mortgages are. Furthermore, China’s financial system is not dominant enough to have the direct global impact we saw with the United States in 2008.”
Nevertheless, he sees a risk in the interconnectedness of economic systems. “We are globally connected,” he says. “When one of the big engines of growth doesn’t work, it affects the rest of us. And it often affects the rest of us in ways we didn’t expect.”
“It’s not that I think we’re in for a repeat of 2008, but the point is that what sometimes seem like local, domestic problems can affect us all. And that too in a way that we could not imagine.’