What would the effect of a recession in China be? That sounds like the start of some dense discussion/speculation of international economics and interest rates. It's not. Actually, it's a question to which the world will soon get an answer. China's economy is on the brink of recession if it is not already there. The Chinese have grown their economy for decades based upon huge investment levels. Roads, bridges, railway systems, ports, and all manner of public infrastructure were built. Simultaneously, private investment was also soaring. Cities were rebuilt. Huge factories were put in place. It was the engine for the Chinese economic miracle that moved China to its position as the world's second largest economy. But then something major happened. The supply of investment goods began to outstrip the actual demand for them. In a true market economy, the economy would have shifted to meet the new levels of demand. In China, the outcome was something different. The command economy pushed growth in the same direction as always. Buildings, streets and neighborhoods were built with thousands of homes/apartments appearing for which there was little or no demand. For a while, Chinese investors actually bought and held vacant apartments as investments which they thought would go up in value. There are literally empty neighborhoods in China that are "investments". This kept growth going, but it was a true waste of resources. Meanwhile, China's economy got laden with more and more debt. Now, the Chinese face a slowing economy, high debt and, to boot, a trade war with the USA that threatens many Chinese products with tariffs in their largest foreign market. It's a recipe for recession.
(Okay, before you tell me that my discussion above is simplistic, let me say that I know that. There's no way to discuss the reasons for a Chinese recession in a blog post without being simplistic.)
A recession in China was and is inevitable. It is much in line with what has happened in nearly every other rapidly developing economy in the world. Countries like Japan, South Korea, Taiwan and the like had decades of rapid economic growth, but after 35 years on average, they each hit recessions followed by long periods of slower growth as the nature of their economies changed. It's about time for that to happen in China.
The question, though, is not what will happen in China, but rather what will the effect of a Chinese recession be in the rest of the world, especially in the US. Some economists say that a Chinese slow down will reduce the profits earned by US businesses on sales in China, will reduce the amount of US Treasury debt purchased by China, and will limit sales of raw materials to China, all of which will cause a slow down in US economic growth. Others see much less of an impact on the US economy. They see the reduction of demand from China as a basis for lower prices around the world for goods and services.
The truth is that we will have to wait and see what happens. It's important to be wary of how this will all turn out.
(Okay, before you tell me that my discussion above is simplistic, let me say that I know that. There's no way to discuss the reasons for a Chinese recession in a blog post without being simplistic.)
A recession in China was and is inevitable. It is much in line with what has happened in nearly every other rapidly developing economy in the world. Countries like Japan, South Korea, Taiwan and the like had decades of rapid economic growth, but after 35 years on average, they each hit recessions followed by long periods of slower growth as the nature of their economies changed. It's about time for that to happen in China.
The question, though, is not what will happen in China, but rather what will the effect of a Chinese recession be in the rest of the world, especially in the US. Some economists say that a Chinese slow down will reduce the profits earned by US businesses on sales in China, will reduce the amount of US Treasury debt purchased by China, and will limit sales of raw materials to China, all of which will cause a slow down in US economic growth. Others see much less of an impact on the US economy. They see the reduction of demand from China as a basis for lower prices around the world for goods and services.
The truth is that we will have to wait and see what happens. It's important to be wary of how this will all turn out.
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