A meaningful economic downturn in China, the world's second-largest economy, could have significant implications for other countries, leading to concern about the already fragile U.S. economic outlook.
However, while it's true that if global financial conditions tighten, it could create a domino effect on GDP growth elsewhere, the effects on real GDP growth in the United States may be minor, in part because American banks' exposure to China is limited.
Key Takeaways
- Concerns about the debt in the Chinese property sector have some observers worried the Chinese economy is headed for an economic "hard landing.”
- Despite the severity of the simulated Chinese growth shock, the effects on real GDP growth in the United States, the Eurozone, and Japan may be minor.
- The minor effect on economic growth in major economies is due to their limited export exposure to China.
Fears are rising that China is headed for an economic "hard landing" due to its property sector's debt accumulation—leading to concerns it may impact other international economies.
Chinese imports would decline if the property sector and economy weakened, transferring some of China's negative growth impulse to other countries. Oxford Economics estimates suggest that a 1% decline in Chinese domestic activity growth could lead to a growth impact of 0.1% to 0.2% for the region's smaller, more open economies.
Economic Issues Not New for China
China has faced economic difficulties before. By 1991, Chinese real GDP had fallen more than 12% below its pre-Tiananmen trend due to the slowdown that began in 1989, but Chinese GDP represented only 2% of the global economy at that time, while today it is over 18%.
According to many forecasters, Chinese real GDP is expected to grow roughly 5% this year. In more than 30 years, China has not experienced a slower GDP growth rate other than during the COVID-19 period. Still, by 2025, according to Oxford Economics' global economy model, each country's GDP growth will only be hit by a quarter to a half-percentage point.
Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. It is sometimes referred to as inflation-corrected to constant-price GDP.
Impact May Be Minor
In a recent interview with CNBC, Philadelphia Fed President Patrick Harker expressed uncertainty regarding how the China slowdown will affect the U.S. economy. However, if the Chinese economy weakens, global financial conditions may tighten, which could create a domino effect on GDP growth in other major economies.
Yet, foreign banks' exposure to China is limited. American banks have about $20 billion in exposure to China, a tiny amount for a system with nearly $23 trillion in assets. At roughly $60 billion each, the Japanese and Eurozone banking systems have more exposure, but the amounts are still manageable.
A debt-induced economic downturn in China would have global economic and financial consequences. However, it is unlikely to trigger another global financial crisis like 2008, which led to a significant slowdown in global growth.
FAQs
For example, output losses in the United States would triple from being modest to become about one-third of the hit to Chinese GDP. Thus, in the event of a China hard landing, the main effect on the U.S. economy could well be through asset price movements and changes in global risk sentiment.
How does China's economy affect the US economy? ›
For example, many U.S. companies source products from China. During the height of the COVID-19 pandemic, this created supply chain constraints as portions of China's economy were virtually shut down. That had a negative impact on business activity for some U.S. companies dependent on Chinese suppliers.
Why China's slowdown is a top risk for the US economy? ›
Persistent slowdown in Chinese consumption for critical minerals could lead to price shocks, injecting additional uncertainty in the global renewable energy transition. Given the extent to which China is integrated with both the U.S. and global economies, the consequences are high and far-reaching.
Is China about to overtake the United States economically? ›
Assuming a 5 percent annual growth rate, China might not overtake the United States until 2035. Some analysts even argue that China's economy may never surpass that of the United States.
Does China have a stronger economy than the US? ›
Measured at market exchange rates, China's GDP was $18.3 trillion in 2022, 73 percent of the GDP of the United States and 10 times more than the 7 percent of US GDP it registered in 1990.
How does the US economy depend on China? ›
U.S. trade with China has grown enormously in recent decades and is crucial for both countries. Today, China is one of the largest export markets for U.S. goods and services, and the United States is among the top export markets for China.
How much does the US economy depend on China? ›
In 2021, 8.6% of total U.S. exports of $1.8 trillion to the World were exported to China and 17.9%of total U.S. imports of $2.8 trillion were imported from China. Mechanical Appliances, Sound Recorders and TV sets were the most traded commodity sectors.
Will China replace the US as the largest economy in the world? ›
The U.S., China and India may take turns leading the global economy this century, according to an analysis from the Centre for Economics and Business Research. The CEBR forecast suggests China could potentially take the top spot as the world's largest economy by gross domestic product as early as 2037.
What does China slow down mean for US trade? ›
For the first three quarters of 2023, China's exports to the U.S. fell by 16.4%, while imports dropped by 6%. China's foreign trade has been hit by a significant decline in global demand, and recovery has stalled since China lifted COVID-19 restrictions.
How would China's slowdown affect the global economy? ›
As China economy slows down, naturally, this means Chinese demand for goods from other countries will also decline. Less Chinese imports means less income for other countries.
The United States is the undisputed heavyweight when it comes to the economies of the world. America's gross domestic product in 2022 was more than 40% greater than that of China, the world No. 2. Even more striking, U.S. GDP was over five times that of the next two largest economies, Japan and Germany.
What year will China overtake the US economy? ›
Consistent with these observations, we show that the timing of China's overtaking will be determined by the pace of US and Chinese nominal GDP growth and moves in the bilateral exchange rate. For a range of plausible assumptions, we find that overtaking occurs during the 2030s, most likely in the middle of the decade.
Will India overtake USA? ›
India on track to surpass US as second-largest economy by 2040: Report - The Economic Times.
What is the richest country in the world? ›
In 2024, Luxembourg is the world's wealthiest nation by GDP per capita. Gross Domestic Product (GDP) is used to evaluate the economic prosperity of nations and their citizens globally.
Which country has the best economy? ›
The United States upholds its status as the major global economy and richest country, steadfastly preserving its pinnacle position from 1960 to 2023. Its economy boasts remarkable diversity, propelled by important sectors, including services, manufacturing, finance, and technology.
Which is richer between USA and China? ›
1- United States: Located in North America, the United States is the world's third largest and most populous country. It has once again surpassed China to become the world's richest country.
How does China's economy affect the world economy? ›
China's rapidly growing import has created numerous job opportunities for the world. The tremendous development of China's foreign trade has propelled the global free flow and optimized allocation of resources. China has become the most favored investment place in the world.
What China's economic woes mean for the US? ›
China is one of the United States' most important trading partners, but trade between the two countries has been unstable. In 2023, China's overall exports declined by 4.6% to $3.38 trillion, according to data released by China's customs office. Exports to the U.S. led the decline, down 13% from the previous year.
How does China's economy affect the global economic system? ›
China's growing economy is also an important source of global demand. Its economic rebalancing will create new opportunities for manufacturing exporters, though it may reduce demand for commodities over the medium-term. China is a growing influence on other developing economies through trade, investment, and ideas.
What does the US need from China? ›
| United States Imports from China | Value | Year |
|---|
| Electrical, electronic equipment | $126.68B | 2023 |
| Machinery, nuclear reactors, boilers | $85.89B | 2023 |
| Toys, games, sports requisites | $33.39B | 2023 |
| Furniture, lighting signs, prefabricated buildings | $20.29B | 2023 |
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