Supplying your Demand: A Chinese economic slowdown will shake the world

Nowadays, it’s inevitable that in a conversation about global superpowers, China is cited as the rising power. How can it not? Politicians yanked it out of the trenches of the Communist Revolution, transforming an incredibly backward entity into the world’s second largest economy.

In 2016, its citizens poured $261 billion into the global tourism industry. President Donald Trump is struggling as it puts up a formidable resistance to his embargo threats. And China has 373 billionaires up to challenge the United States’ 585.

With the glamorous splendor that they showcased on the global stage — view the “Bird’s Nest” stadium from the 2008 Beijing Olympics — who would believe they’re marching toward the edge of a cliff?

Yet China, even with its flourishing cities that challenge New York City’s iconic skyline, is not impervious to an economic slowdown.

We aren’t just talking about a routine downturn that every single business cycle is subject to. There are cracks showing in a superficially successful quasi-capitalist model. In fact, it is painfully obvious that the government is slapping band-aids onto a gaping wound that, if not treated, could potentially be the first step toward diving headfirst into a 2008-esque financial meltdown.

In order to understand how the symptoms aren’t more present, we must examine the underlying problem — China’s current model is founded upon command economy principles. China doesn’t adhere to the capitalist school of thought that “market forces” guide economic growth. Its government constantly turns the other way painting an unfair image for the thousands of firms that consumption will go on as usual in spite of obstacles.

Take, for instance, how the Chinese government has spun the trade war. President Trump has piled on gargantuan tariffs, upwards of $200 billion, on Chinese imports, while a staggering 22 percent of its exports are to the United States. This cost in conjunction with already negative perceptions of Chinese goods is driving away a once-reliable market.

Asian investors, once amazed by the region’s unprecedented growth, have begun pulling out, causing Asian stocks to slip and slide. The government can say that it’s going to open its doors to globalization all it wants, but if the consumers and investors don’t get reassurance with some sort of truce, domestic consumer sentiment will undoubtedly go down the same rabbit hole.

And this political spat could not have poorer timing. In midst of this trade debacle, the government is poking a sleeping bear: its crippling debt.

Analysts at J.P. Morgan believe China could enact a softer monetary policy or fiscal policy — selling more government bonds — to sufficiently absorb the shock in private sector demand by artificially inflating growth.

A relaxed monetary policy would act as a crutch for demand and allow a relatively robust currency to offset the consequences of the trade war. Depreciation of the yuan would counter the tariffs’ effect, “cheapening” Chinese goods and, therefore, bolstering their attractiveness to the average American consumer.

However, without proper deliberation, doing so would endanger the optics of authorities who promised to reduce debt. The pristine surface that the Chinese government presents cannot be maintained if shady cyber espionage, banking practices and regulatory practices aren’t addressed soon.

So why does any of this matter? One might correctly suppose that all economies face bumps in the road. However, China’s output contributes a huge proportion, 15 percent, of the global economy, and so many international companies have manufacturing ties to the country.

The sheer size of the economy alone lets it affect global prices on goods and services, to a lesser extent. Any sort of slowdown on its part will shape the world’s future. But I don’t want to overstate my fear. Humans are frightened by the unknown, but economic slowdowns are inevitable — the larger concern is what happens after China experiences economic turmoil.