BEIJING – China’s economy was meant to drive a third of global economic growth in 2023, so its dramatic slowdown in recent months is sounding alarm bells across the world.
Policymakers are bracing themselves for a hit to their economies as China’s imports of everything from construction materials to electronics slide. Caterpillar says Chinese demand for machines used on building sites is worse than previously thought. US President Joe Biden called the economic problems a “ticking time bomb”.
Global investors have already pulled more than US$10 billion (S$13.55 billion) from China’s stock markets, with most of the selling in blue chips. Goldman Sachs Group and Morgan Stanley have cut their targets for Chinese equities, with the former also warning of spillover risks to the rest of the region.
Asian economies are taking the biggest hit to their trade so far, along with countries in Africa. Japan reported its first drop in exports in more than two years in July after China cut back on purchases of cars and chips. Central bankers from South Korea and Thailand last week cited China’s weak recovery for downgrades to their growth forecasts.
It is not all doom and gloom, though. China’s 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 is a benefit to countries such as the United States and Britain that are still battling high inflation.
Some emerging markets like India also see opportunities, hoping to attract the foreign investment that may be leaving China’s shores.
But as the world’s second-largest economy, China’s prolonged slowdown will hurt, rather than help, the rest of the world. An analysis from the International Monetary Fund shows how much is at stake: When China’s growth rate rises by 1 percentage point, global expansion is boosted by about 0.3 percentage points.
China’s deflation “isn’t such a bad thing” for the global economy, said Mr Peter Berezin, chief global strategist at BCA Research. “But, if the rest of the world, the US 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 is a look at how China’s slowdown is rippling across economies and financial markets.
Trade slump
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 Covid-19 pandemic. The value of shipments from Africa, Asia and North America were all lower in July than they were a year ago.
Africa and Asia have been the hardest hit, with the value of imports down by more than 14 per cent in the first seven months of 2023. Part of that is due to a drop in demand for electronics parts from South Korea and Taiwan, while falling prices of commodities such as fossil fuels are also hitting the value of goods shipped to China.
So far, the actual volume of commodities such as iron or copper ore sent to China has held up. But if the slowdown continues, shipments could be impacted, which would affect miners in Australia, South America and elsewhere around the world.
Deflation pressure
Producer prices in China have contracted for the past 10 months, meaning the cost of goods being shipped from the country is falling. That is welcome news for people around the globe still struggling with high inflation.
The price of Chinese goods at US docks has fallen every month in 2023, and that is likely to continue until factory prices in China return to positive territory. Economists at Wells Fargo & Co estimate that a “hard landing” in China – which they define as a 12.5 per cent divergence from its trend growth – would cut the baseline forecast for US consumer inflation in 2025 by 0.7 percentage points to 1.4 per cent.
