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Stop worrying about China

Sabri Ben-Achour Aug 24, 2015

Stop worrying about China

Sabri Ben-Achour Aug 24, 2015

Yes, markets are shedding value on fears that China’s economy will slow sharply and more deeply than expected. 

Markets, however, “can go off on a path on their own that’s not very much connected with reality,” says Nicholas Lardy, senior fellow at the Peterson Institute for International Economics.

“People have gotten spooked a bit with some specific numbers coming from industry — China’s exports are down, the so-called purchasing manager’s index of industry is down,” says David Dollar, senior fellow at the Brookings Institution’s China Center. “But that’s just one part of the economy, and it’s an increasingly less important part of the economy. They’ve been growing primarily on the service sectors … one of the main sources of employment in China.” Part of the nervousness is that there’s not a lot of updated data on those sectors.”

The Peterson Institute’s Lardy agrees. 

“I look at all the evidence, and it’s hard to say the [Chinese] economy is slowing dramatically,” he says. “Wage growth is strong, 10 percent, the service sector is expanding at more than 8 percent, and there are a number of other indicators that suggest this economy is still doing reasonably well.”

To the extent markets are concerned for the U.S., that concern may be an overreaction.

“The U.S. has relatively little vulnerability to a slowdown in China — if it were to occur,” says Lardy.

First, the U.S. is not strongly linked to China via direct exports. Dollar estimates it’s less than 1 percent of U.S. economic output. Those sectors that do export directly would be affected: aircraft, some sophisticated machinery and power plants. 

“There are a lot of important companies — Caterpillar, General Electric, United Technologies just to name a few — that produce goods in China that they mostly sell in China,” says Lardy. “And many of those are in capital-intensive sectors, and the sales of those companies in China have already been slowing down quite a bit. Because investment in property has declined, there’s less construction activity.”

To the extent that a Chinese slowdown would depress economies of countries that export commodities to it, that can reduce demand for U.S. products. “If the Chinese slowdown really hurts other economies that are connected to the U.S., then we, of course, we feel this indirectly,” says Dollar. But he says a more significant source of pressure is the strong dollar itself, which has made U.S. exports less attractive.

A decrease in demand in China could also further depress oil and commodity prices, which would have various effects on the U.S. economy. Cheaper commodities and oil would be a boon to consumers, but exacerbate problems in the U.S. oil and gas industry.

“It really depends on if you see China as a consumer, if you see them as a source of goods, if you see them as a partner or a potential competitor,” says Clara Gillispie, director for trade economic and energy affairs at the National Bureau of Asian Research. Different firms and sectors will experience a Chinese slowdown differently.

Even the scary market fluctuations are not as scary as they seem. Justin Wolfers, professor of economics and public policy at the University of Michigan, says market watchers need a dose of context.

“U.S. financial markets are down a few percent, as are other major countries’,” he says. “But take a step back from last week and look at the last seven years — the U.S. stock market has more than doubled. So stocks are still up literally hundreds of percent over the period since the Great Recession ended. So over that broad historical context, this move matters and affects your savings, but it’s not large, and it’s just clawing back some of the extraordinary gains of recent years.”

So yes, the U.S. is a little bit vulnerable to a Chinese slowdown, but we’re also vulnerable to a lot of other things. Like the weather. Or the Federal Reserve.  

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