Americans have gotten used to worrying about China’s power. They may need to start worrying about its powerlessness.
Central banks have been widely credited with helping the global economy escape major pitfalls since the financial crisis over a decade ago. Now, the Federal Reserve is cutting rates again to forestall the next downturn. But all along, China has played a bigger role: Whenever global growth faltered, Beijing splurged on roads, airports and housing developments that fed companies and their employees across the globe.
Worryingly, this secret weapon seems to be losing its force.
The Asian giant is grappling with a structural slowdown. Moreover, data suggests that economic growth isn’t transmitted across borders as effectively as before.
China recently reported its slowest growth since 1992 in the second quarter, attracting headlines. The knock-on effect has been less well documented. Trade is now acting as a drag on the U.S. economy, second-quarter data show. In the eurozone, services remain robust but manufacturing activity—which depends more on exports—has fallen to its lowest level in almost seven years.
This isn’t a problem that will swiftly go away, even if fresh trade talks between the U.S. and China yield results. China’s problems long preceded President Trump’s tariffs. Maintaining the breakneck growth of yesteryear—at a point when the country already has caught up with most of the developed world’s technology—was always a monumental task.
It is made even more formidable by Beijing’s attempts to bring down a massive debt pile. Every round of stimulus has pushed new forms of leverage into opaque corners of China’s financial system, including local-authority debt and wealth products held by so-called shadow banks.
The latest slowdown has left officials with no choice but to restart fiscal policy.
The stimulus package launched at the end of last year amounts to about 5.6% of Chinese gross domestic product, according to analysts at
This is about half the size of the gargantuan 4 trillion yuan ($580 billion) program launched after 2008, but similar to the 2015 stimulus, which worked out at 5.4% of GDP.
The economy has been slow to react. Part of the problem is that the central government has been reluctant to get too involved. It has avoided amassing more debt itself and has prioritized tax cuts over direct job creation.
The main concern for the rest of the world, however, is that the share of this stimulus that reaches other countries is shrinking.
Bhanu Baweja, an economist at
has long been warning that the ratio of world import growth to GDP growth has been falling back to its pre-1980s norm—so one country’s success doesn’t benefit its trading partners as much as it used to. Globalization is in retreat and so is the halo effect of China’s growth.
Between 2011 and 2018, each extra point of world GDP growth boosted imports by 1.4%, UBS data shows, compared with 2.2% in the period of accelerated globalization between 1986 and 2008, when China emerged as an economic superpower. The ratio keeps diminishing: In the past 12 months, it was 0.6%.
This is partly due to the shale revolution, which has made the U.S. far less dependent on foreign energy. There are broader reasons too, such as manufacturers tiring of long supply chains and moving production closer to their customers.
But China’s propensity to import has also dropped over the last 15 years as the country’s domestic production has become increasingly sophisticated and it has needed less foreign steel and machinery. This process seems entrenched. Chinese technology giant Huawei has responded to President Trump’s restrictions on its use of U.S. suppliers with plans to roll out its own operating system to replace Google’s Android, for instance.
Without rocketing exports to China, it is unclear where Western economies will find their next big source of economic demand.
After the 1970s, many nations around the world kept inflation in check by limiting wage growth. Debt, often funded by house-price growth, picked up the slack in the consumer economy. When the debt bubble popped in 2008, Chinese growth and central-bank stimulus became the engines that kept the world economy chugging along.
But low interest rates have proven largely ineffective in reviving spending and China won’t be the safety net that it once was. At some point, policy makers may need to look back to a previous era of wage growth and active fiscal policy for inspiration.
To be sure, a recession still isn’t on the horizon. The U.S. in particular has been protected from China’s slowdown by its more domestically focused economy.
When the global economy does start misfiring, though, investors will need a new benefactor.
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Write to Jon Sindreu at email@example.com
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