The economic travails of the post-pandemic years have led to
intense intellectual and policy debates. One thing almost everyone agrees on, however,
is that the post-COVID crisis bears very little resemblance to the global
financial crisis of 2008.
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So, sure enough, China — the world’s biggest or
second-biggest economy, depending on how you measure it — seems to be teetering
on the edge of a crisis that looks a lot like what the rest of the world went
through in 2008.
I’m not confident enough in my understanding of China to
judge whether it will manage to contain its Minsky moment, the point at which
everyone suddenly realizes that unsustainable debt is, in fact, unsustainable.
In fact, I’m not sure if anyone — including Chinese officials — knows the
answer to that question.
But I think we can answer a more conditional question: If
China does have a 2008-style crisis, will it spill over in a major way to the
rest of the world, the United States in particular? And there the answer is
pretty clearly no. Big as China’s economy is, America has remarkably little
financial or trade exposure to China’s problems.
Before I get there, let’s talk about why China in 2023
resembles the North Atlantic economies, both America and Europe, in 2008.
The 2008 crisis was brought on by the bursting of a huge,
trans-Atlantic housing bubble. The effects of the burst bubble were magnified
by financial disruption, especially the collapse of “shadow banks” —
institutions that acted like banks, created the risk of what amounted to bank
runs, but were both largely unregulated and lacking the safety net provided to
conventional banks.
Now comes China, with a real estate sector even more swollen
than those of Western nations before 2008. China also has a large, highly
troubled shadow-banking sector. And it has some unique problems, notably huge
debts owed by local governments.
The good news is that China isn’t like Argentina or Greece,
nations that owed large sums to foreign creditors. The debt in question here
is, in essence, money China owes to itself. And it should in principle be
possible for the national government to resolve the crisis through some
combination of bailouts of debtors and haircuts for creditors.
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.
empowering individuals to make more decisions over how they spend their money.
How much has the United States invested in China? Direct
investment — investment that involves control — in China and Hong Kong is about
$215 billion. Portfolio investment — basically stocks and bonds — is a bit more
than $300 billion. So we’re talking around $515 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 U.S. commercial real estate, especially office buildings, which
probably face a permanent reduction in demand because of the rise in remote
work. Well, U.S. office buildings are worth about $2.6 trillion, or around five
times our total investment in China.
Why has a huge economy attracted so little U.S. 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.
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 $150
billion in 2022, less than 1 percent of our gross domestic product. So a
Chinese slump wouldn’t have much direct effect on demand for U.S. 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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