Europe and commodity-producing emerging markets, like Brazil and Indonesia, that rely heavily on exports to China are especially vulnerable.
China’s economy is facing a world of hurt. If policy makers don’t act aggressively to stem a downward spiral in consumer and business confidence, that pain could spread to the U.S. and the rest of the world.
The flailing property market is creating its own ripples with developer Evergrande filing for U.S. bankruptcy, and Country Garden, a property developer that survived the sector’s turmoil when policy makers deflated a housing bubble, missing bond payments. The troubles are hitting shadow banking, with investors saying they didn’t receive payments from investment products managed by Zhongrong International Trust.
Given the policy bind, many economists see China headed for some version of a hard landing, potentially missing its already lowered expectation for economic growth this year of “around 5%.” Capital Economics economists see the risk of recession—less than 3% growth in China’s case—and expect second-half growth averaging only 3%, and that’s only if Beijing steps up stimulus.
MORE CHINA MUST-READS There will be fallout. Large multinational companies like Caterpillar and DuPont have already warned of weakness from China. are already warning of pain, with Caterpillar and DuPont highlighting weakness. If consumers and companies in China curtail spending further, companies like Apple and Nvidia could also face pressure.
“The data from China is very obscure so when you see something, you can’t be sure if it is the tip of the iceberg. If there are three or four more [stories about big Chinese companies under pressure], the market will connect the dots and say this is worse than we thought and reprice, even in the U.S.,” says Claudio Irigoyen, Bank of America’s head of global economics, who says a stock selloff could cool consumer demand in the U.S. “Can the U.S. continue booming with China going under? No.
“Beijing is going to be crucial in rekindling optimism and getting China spending and investing again, and the sooner that happens, the better the prognosis for dodging a hard landing,” Wool says.
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