Hyounsik Noh Looks at the Impact of the Chinese Economic Slowdown on the U.S. Market
While the Chinese economy is still surging at around 6.5 percent annually — which is the kind of growth that most other countries would be delighted to experience — it is about half the rate that the country has been enjoying for more than two decades. And while nobody is yet predicting a Chinese version of the Great Recession, there is widespread belief within China’s leadership and across the international commercial landscape that things are going to get worse before they get better.
According to Hyounsik Noh, a graduate student in Enterprise Risk Management at Columbia University, a slowdown in the Chinese economy can influence the U.S. market on two major fronts: trade and the bond market.
The Trade Market
With respect to trade, China is the U.S.’s third largest export market (only behind NAFTA/USMCA partners Canada and Mexico), and China is in the top five export markets for 46 states. Furthermore, U.S. exports to China — which has grown 86 percent in the last decade, compared to 21 percent growth with other countries around the world — supports approximately one million jobs in the U.S. across a variety of sectors and industries, including agriculture, computers, electronics, oil and gas, logistics, education, professional services, and more. Given these weighty numbers, it does not require a PhD in economics to realize that a sustained drop in Chinese consumer demand will have a significantly adverse impact on the U.S. economy.
According to Hyounsik Noh, the relatively economic slowdown in China, due to both internal issues and the ongoing trade war with the U.S., is affecting consumer demand that in turn is triggering U.S. job losses. For example, citing reduced demand in China for its Jeep Cherokee vehicle, in February Fiat Chrysler eliminated a third shift at a plant in Illinois, which meant laying off 1,400 autoworkers.
The Bond Market
With respect to the bond market, China is the largest holder of U.S. Treasury securities, accounting for about 21 percent of all U.S. foreign debt. Whether to prop up its own economy or fire a warning shot at the U.S. amidst trade tensions — or accomplish both objectives at the same time — China could start selling its securities, which would ultimately drive up U.S. interest rates (as U.S. bond prices fall) and impede domestic investment.
While it’s true that China could severely damage the U.S. market by aggressively selling its U.S. Treasury securities, this doomsday scenario is unlikely to happen for a couple of reasons. The move could backfire on China due to capital losses on their existing holdings, and other investors would scramble to buy whatever U.S. Treasury securities China was selling. Still, with this being said, last October China did sell $3 billion in U.S. Treasury securities. That has only happened three other times since 2004, and it was the first time that 30-year bonds were involved. So, while there is no reason yet to panic, there is certainly cause for concern and a close examination of decisions that come out of both Washington, D.C. and Beijing, respectively.