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  October 20th, 2016 | Written by

The Domino Effect of China’s Economic Slowdown

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  • As China goes, so goes the world economy.
  • China’s credit situation could result in the kind of recession that crippled the U.S. economy in 2008.
  • Optimism on global economic prospects is in short supply from Britain to Brazil.

In the 1800s a popular American saying was “As Maine goes, so goes the nation,” meaning that what happened in Maine had a significant impact on U.S. presidential elections.

Today, some economists are adapting that sentiment to “As China goes, so goes the world.”

Beijing recently announced a 6.7 percent economic expansion in the third quarter, matching predictions and consistent with its last two quarters. One is tempted to be encouraged by such remarkable stability. However, economists are looking beyond the numbers to observe that this year’s pace of growth will still be slower than last year’s, which was the slowest in 25 years. If that trend continues, what are the repercussions for both China and the rest of the world?

According to the Bank for International Settlements, the gap between China’s outstanding credit and its long-term economic growth is now wider than it has ever been. That could result in the kind of recession that crippled the U.S. economy in 2008.

The debt burden is too large to be solved by increased spending, but a crisis could be avoided through China’s tight control over its banks and industry, as well as adjusting the value of it currency. A debt-restructuring plan offers another option, though none has been proposed yet.

A Contagious Malaise

The China impact on the global economy and international trade might not be as profound if other nations were picking up the slack. Unfortunately, optimism is in short supply from Britain to Brazil.

An increase in trade volumes would help stabilize markets, but 2017 economic forecasts are already being downgraded – and they weren’t that rosy in the first place. Both Britain and Europe have been adversely affected by the Brexit vote, at least in the short term. The U.S. economy can’t break free from a sluggish two-percent growth rate, with 2017 not expected to be any better no matter who is elected president next month.

The International Monetary Fund has cut its 2017 predictions for global growth, with most economists expecting 3.2 percent growth next year. Not surprising, then, that the World Trade Organization has reduced its trade forecast by more than one-third last month, and growth in international commerce is now predicted to lag behind the world economy for the first time in 15 years.

And next year? Trade may rise, but by as little as 1.8 percent. The most positive projection has it at 3.1 percent, still down from earlier expectations.

Bad Attitudes

One reason for such dire forecasts has been a growing hostility toward trade, which played a role in the Brexit decision and has been a heated debate topic for America’s presidential candidates. Globalization is no longer a goal but a threat.

Which brings us back to China. Much of the animosity that has arisen against trade has its origin in the emergence of China as an economic power.

Free trade used to be as popular as baseball and apple pie because of the lower prices it produced for many goods, and the competition that spurred American industry to greater quality and efficiency.

Today, many Americans now view trade as a rigged system that rewards countries that produce the cheapest products, often by paying the cheapest factory wages. Not only is China at the forefront of this movement, it is also under fire for currency manipulation and stealing U.S. trade secrets. The result: 3.4 million U.S. factory jobs gone since China joined the World Trade Organization, stagnant American wages, and an American trade deficit with China of more than $330 billion.

Donald Trump has promised to put a stop to all of this by renegotiating trade deals, and ditching both NAFTA and the Trans-Pacific Partnership (TPP). Hillary Clinton was for TPP before she was against it, but remains the best hope for its ultimate passage.

The Chinese government’s ability to stave off recession may be the most significant factor in how trade fares in 2017 and beyond. Its success or failure figures to have repercussions far beyond its own national borders.