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Why The Chinese Recession Would Affect All of Us

Sun, 16th Jun 2019

Some analysts say that if a recession were to occur in China, it would only affect the Chinese. That’s wishful thinking in the eyes of others, though, as the Chinese economy has massive leverage. The trade war between the US and China is starting to cause ripples in the economy, and the rate of growth of the Chinese economy was already starting to slow.

The International Monetary Fund says that an economic slowdown in China would hurt us all. The US is still the biggest importer of ‘final consumption’ goods, while China tends to import intermediate goods. Even so, China consumes a lot, and the UK has companies that do profit from selling to China.

Investors have their eye on interest rates, because of how they affect investment and consumption, and because tech firm valuations do depend on profit growth. A Chinese recession may impact interest rates.

Standard wisdom says that if a major economy slows down, world aggregate demand slows and interest rates worldwide are pushed downward. Modern wisdom takes a slightly more nuanced view. Paradoxically, a Chinese slowdown could increase rates elsewhere, especially if a crisis were to cause a draw-down on Central bank reserves. For the global capital markets, a Chinese recession could be a painful blow.

The Euro zone is in trouble too. It is already in a politically and economically fragile state, and troubles elsewhere could push it over the edge. Debt levels are rising, and a rise in global interest rates would be trouble for Turkey and Argentina, and potentially cause the contagion to spread to other struggling countries.

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