China’s economy is growing slower than government projections, its central bank president is reportedly being pushed out and protesters are jamming the streets of Hong Kong in the tens of thousands. Should we worry?
Yes. But not yet.
China’s economic slowdown is just one of several global factors dragging against the U.S. economy. The European Union is flirting with recession. Brazil is already there and the rest of South America is slowing down, in part because of China’s sagging demand for commodities such as soybeans and copper. Russia is being treated as a financial pariah for its forays into neighboring Ukraine.
“You have a bunch of uncertainties out there, many of which are hard to quantify,” said Jay Bryson, global economist for Wells Fargo Securities in Charlotte, N.C. “It would take a pretty significant downturn in the rest of the world to have a real marked effect on U.S. (economic) growth.”
It’s not to say that there aren’t some troublesome trends in China that could get much worse. Only a few years ago, its economy was growing at double-digit rates. This year, it appears on pace to fall short of the government’s growth target of 7.5 percent – tepid by Chinese standards.
That slower growth is felt globally, especially in places such as Brazil, which now provide lesser quantities of soy beans to China, or Chile, which provides less copper. China is also a robust and growing market for U.S. exports, and the slowdown has shaved off growth for American firms. July exports to China were about $1.1 billion below January’s export figures.
As the world’s most developed economy, the United States is far less dependent on exports than most other nations for growth. But a downturn in China still means Boeing sells fewer airplanes, General Motors sells fewer cars and U.S. poultry exporters in the Carolinas and elsewhere feel the pinch.
Offsetting those slowing exports, however, is this important fact: Lower global commodity prices mean lower costs for U.S. businesses and consumers, leaving each with more money to spend in the U.S. economy.
This is especially true with falling energy prices, caused in part by reduced demand in China, which gives American consumers more cash in the wallet.
Nonetheless, weak economic data from Europe and broader concerns about a global economic slowdown roiled financial markets Wednesday. The Dow Jones Industrial Average fell 238.19 points, or 1.4 percent, to 16,804.71. The S&P 500 finished off 26.13 points to 1,946.16, and the NASDAQ closed down 71.3 points, or 1.6 percent, to 4422.09.
Adding to the sense of uncertainty about China, The Wall Street Journal reported in late September that Chinese leader Xi Jinping may sack the longstanding head of the central bank, Zhou Xiaochuan.
There’s risk later this month in removing Zhou, 66, because he’s been the face of China’s economic policy to the outside world. But Zhou, who is past mandatory retirement age, is thought to frown on efforts to further stimulate China’s slowing economy through easier credit.
“Some sectors under stress want more relaxed credit,” said Nicholas Lardy, a China expert at the Washington-based Peterson Institute for International Economics, who just returned this week from a research trip to China.
The central bank has increased credit to promote subsidized housing for poorer Chinese, and it gave a break to banks that can demonstrate a high percentage of their lending goes to small business. But beyond that, the idea of looser credit does “not have much traction at the top of the political system,” he said.
China’s slowdown is actually good thing, said Lardy, because it reflects a transition to a more consumer-led, services-driven economic growth, less dependent on foreign exports. And the government is trying to slowly deflate property prices.
“It’s a fine line,” he said. “They don’t want the property boom to continue indefinitely . . . they don’t want a complete collapse (either). They are trying to let the air out of the balloon.”
And then there are the growing protests in Hong Kong. The scenes of tens of thousands of young students on the streets there eerily remind of the infamous government crackdown in 1989 on student protesters in Beijing’s Tiananmen Square.
Student demonstrators are upset about Beijing’s rules for Hong Kong’s next election of its chief executive in 2017. For the first time, voters in the former British colony will enjoy universal suffrage. But there’s a catch: The rules are designed to ensure any candidate who runs will be to Beijing’s liking.
China has pulled police off the streets of Hong Kong for now to defuse the tension, and this is a holiday week. Next week may determine whether or not the protests are quelled with force.
“I don’t think that we’re going to see anything like that in China,” said Gus Faucher, senior economist for Pittsburgh-based PNC Financial Services.
Absent some unforeseen shock, China’s economic challenges are unlikely to become a problem for the growth rate of the U.S. economy.
“I think that this makes a difference around the edges,” Faucher said.
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