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The Chinese economy is faltering. The risk of a real recession looms large, and the most optimistic scenario under current leadership would be slow growth, far slower than in recent decades.

China is important to the United States economy. It accounts for about nine percent of all U.S. exports and a much higher share for some western states such as Oregon and Washington. China is also an important trade partner for other countries to which we are closely tied, such as Canada and Japan. More importantly, China supplies American consumers and businesses with many goods at low prices. Sam Walton said that Walmart “helps save people money so they can live better;” China could make the same claim for its U.S. consumers. Supply chains for U.S. manufacturers, wholesalers, and retailers use many Chinese products.

Signs of Chinese economic weakness dominate recent news reports. Youth unemployment was nearly 20% in July 2022. The purchasing managers' index fell in the latest report, Home sales declined 40% from a year ago. GDP rose by just 0.4% over the past four quarters, compared to the national target of 5.5% growth.

Is America at risk of the same problems that are weakening China? And if not, how much will we be hurt by their weakness? America has some risk of China’s problems and a higher probability of mild damage to our economy due simply to their economic decline.

China’s greatest problem is its leadership’s heavy-handed efforts to control the people, and thus the economy. China’s economic gains began in the late 1970s when Mao’s successor, Deng Xiaoping, liberalized economic regulations. Farmers were allowed to leave collectives, small businesses were tolerated and foreign investment was welcomed. In the following decades, China enjoyed the greatest alleviation of poverty in world history.

Now Xi Jinping has reasserted government control of many aspects of people’s lives, with widespread impacts on the economy.

The Zero-Covid policy has locked down major cities and closed ports. Combine this with the jingoist vaccine stance—only Chinese vaccines have been approved—and the country’s low performance in full vaccination of its elderly. Fear of losing face, such as by approving a foreign vaccine that performs better, and hubris about the leaders’ ability to manage complex systems pull down performance across other areas as well.

China’s tech sector, led by Jack Ma’s Ant Group, showed the world that online payments can be cheap, easy, and widespread. Before the world caught up with China, though, Xi imposed controls that limit its tech sector and will likely prevent further innovation.

Increased control of the economy comes as excesses in the housing industry wallop the population. Many people bought apartments before they were built, paying mortgages on properties still under construction. When construction slowed or stopped, the buyers lost pride in ownership. China’s bankruptcy law captures the key features of modern Western practices, but one legal expert reported, “The Chinese bankruptcy law in action often changes from case to case and from time to time without sufficient certainty.”

Two political scientists summed up the situation: “Xi’s refusal to allow economic logic to drive policy is a considered strategy in service of political and ideological control. Xi never saw economic growth as an imperative the way his predecessors did, but the challenges posed by Covid-19 and the recent growth slowdown accelerated his abandonment of an economics-first governance strategy. Foreign observers and policymakers should not expect Xi to moderate his autocratic demands on the Chinese economy or society in his third term.”

With economic growth secondary to political control, China’s consumers and businesses will suffer, at least relative to where they might have been.

China’s problems are not entirely foreign to America. Our leaders sometimes save face to the detriment of the public, and at other times claim greater ability to formulate good policy than is warranted. However, our checks and balances make massive blunders far less likely to continue than in a party dictatorship as China has.

Business leaders in the United States worry that weakness in China will harm the U.S. economy, a valid concern given our close ties. The magnitude of trade between the two economies is small enough to calm macroeconomic fears. Last year our exports to China of $151 billion amounted to just two-thirds of one percent of our $23 trillion GDP. Lack of growth in China, or even a severe recession, would have too small an impact to notice in the aggregate, though certain companies would be hurt significantly.

Businesses that do a large volume of transactions with China, either as buyers or sellers, should consider how the shift to political control of the economy will impact them separately from the size of the Chinese economy. Already American companies that rely on Chinese suppliers are worried about supply chain snarls from the Zero Covid policy. The potential for war over Taiwan has increased as Xi made clear that politics and control are more important than the economy. Although most businesses that have been buying Chinese products cannot make a sudden change in all of their suppliers, gradual adjustments are already beginning. These purchase reductions will accentuate China’s economic problems.

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