China is the 800-pound gorilla in today’s world: It’s the largest economy, at $25.3 trillion in 2018 with the largest population at 1.4 billion. Until the beginning of 2019, China had been the United States’ largest trading partner, beating out Mexico and Canada. China achieved that economic power with a rocket-fast growth rate that averaged 9.5 percent between 1979 and 2018, quadrupling the size of its economy between 2001 and 2017. That speedy growth lifted some 800 million people out of poverty.
But, for the last few quarters, China’s growth has been slowing, and fell to just 6.0 percent for the third quarter of 2019, a 27-year low. The reasons for that decline include the following:
- Ongoing trade disputes with the United States. Uncertainty is resulting in lower factory orders from U.S. companies, with some factories in China laying off workers.
- Growth heavily financed with government and private debt. China has pursued a “build it and they will come” philosophy, but this is beginning to fray as some new office buildings remain largely vacant while developers struggle to make debt payments.
- A shrinking auto sector. As the economy slows, fewer Chinese are opting to buy cars of any kind, and certainly fewer of the more expensive American cars.
- A maturing economy. China is beginning to shift from a manufacturing- and export-driven economy to one focused more on services and domestic consumption. As part of this shift, China will also have to deal with the pollution that has been a by-product of rapid manufacturing growth.
- An aging workforce. China’s long-standing one-child policy was successful in reducing population growth but, that policy has also resulted in a rapidly aging population. By 2020, as much as 20 percent of the population may be over the age of 60.
What are the impacts for the United States?
When a big part of the global economy slows down, everyone feels the impact. Here are a few ways that China’s slowdown might impact our clients and our businesses:
The global economy may also slow. As the biggest economy in the world, a 1 percent drop in China’s growth rate could shave 0.2 percentage points off global growth, as reported by the BBC.
U.S. unemployment may rise. U.S. exports to China support an estimated 2.6 million U.S. jobs in sectors such as services, agriculture and capital goods, so a slowdown in the Chinese economy could hurt workers here.
Commodity prices may drop. China is the world’s second largest importer of raw materials.
As China’s growth slows, shrinking demand may decrease prices for commodities. Countries such as Australia, Brazil, Canada, and Indonesia that depend on commodity exports may see their growth rates drop. But, since our nation is the biggest importer of raw materials, this could be an overall benefit, particularly if oil prices also drop. However, farmers in the United States already dinged by the ongoing trade dispute may see further problems.
Higher prices for consumer goods. With the largest population, China’s per capita income and standard of living are still fairly low, which has kept labor prices down. According to an Oxford Economics study, this translates to a drop of 1 to 1.5 percent in U.S. consumer prices, which saved the average American household $850 in 2015. But, as China’s growth slows and Chinese wages creep up, that savings could evaporate.
The U.S. auto sector is feeling a pinch. The Big Three auto manufacturers – Ford, GM and Chrysler— were expecting to manufacture cars in China with cheap labor, then export those back to the nation, as well as selling American cars to China. China had been the world’s biggest buyer of cars and the biggest producer of cars. But the U.S. trade war has thrown a wrench in those plans, and the Chinese are buying fewer cars as their economy slows. When they do buy, less expensive Chinese cars are growing in popularity. A growing ride-hailing business is also disrupting the Chinese auto sector, which has been declining since 2018.
Companies that trade with China may see decreased profits. U.S. companies in diverse sectors such as Procter & Gamble, Apple, Prada, and Intel are seeing sales to China drop, which could hurt their profits. Lower profits could cause a decline in stock prices and a drop in U.S. consumer confidence, pulling the economy down.
Depending on your clients’ businesses, they could see more specific impacts. But, the impacts I describe here may be felt by everyone. Alerting your clients to impacts from the global economy is part of being a trusted advisor!