But is China’s government competent enough to manage the kind of financial restructuring its economy needs? Do officials have sufficient resolve or intellectual clarity to do what needs to be done?
I worry especially about that last point. China needs to replace unsustainable real estate investment with higher consumer demand. But some reporting suggests that top officials remain suspicious of “wasteful” consumer spending and balk at the idea of “empowering individuals to make more decisions over how they spend their money.” And it’s not reassuring that Chinese officials are responding to the potential crisis by pushing banks to lend more, basically continuing along the path that got China where it is.
So China may have a crisis. If it does, how will it affect us?
The answer, as far as I can tell, is that America’s exposure to a potential China crisis is surprisingly small.
How much has the United States invested in China? Direct investment — investment that involves control — in China and Hong Kong is about $US215 billion. Portfolio investment — basically stocks and bonds — is a bit more than $US300 billion. So we’re talking around $US515 billion in total.
That may not sound like a small number, but for an economy as big as ours, it is. Here’s one comparison. Right now, there are many concerns about US commercial real estate, especially office buildings, which probably face a permanent reduction in demand because of the rise in remote work. Well, US office buildings are worth about $US2.6 trillion, or around five times our total investment in China.
Why has a huge economy attracted so little US investment? Basically, I’d argue, because given the arbitrariness of Chinese policy, many potential investors fear that the nation may be a kind of Roach Motel: You can get in, but you may not be able to get out.
In economic terms, we seem to be looking at a potential crisis within China, not a 2008-style global event.
What about China as a market? China is a huge player in world trade, but it doesn’t buy much from the United States — only about $US150 billion in 2022, less than 1 per cent of our gross domestic product. So a Chinese slump wouldn’t have much direct effect on demand for US products. The effect would be larger for countries that sell more to China, including Germany and Japan, and there would be some ricochet effect on America via sales to these countries. But the overall effect would still be small.
A Chinese economic crisis might even have a small positive effect on the United States, because it would reduce demand for raw materials, especially oil, and as a result possibly reduce inflation.
None of this means that we should welcome the possibility of a Chinese slump or gloat over another nation’s troubles. Even on purely selfish grounds, we should worry about what the Chinese regime might do to distract its citizens from domestic problems.
But in economic terms, we seem to be looking at a potential crisis within China, not a 2008-style global event.
This article originally appeared in The New York Times.
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