China’s Slowdown Casts a Shadow
China’s economic slowdown and financial mayhem are fostering a cycle of decline and panic across much of the world, as countries on nearly every continent see escalating risks of prolonged slumps, political disruption and financial losses.
South Africa’s currency, the rand, plunged on Monday after stocks once again sold off in China, which is the country’s largest trading partner. South Africa’s economy — like that of many countries on the African continent — had been fueled by China’s hunger for natural resources, but the slowing demand now threatens to compound its many other problems and worsen a food crisis.
Throughout South America, China’s declining appetite for commodities has led to deep recessions and talk of a “lost decade.” Venezuela is facing inflation in the double or triple digits, Brazil is experiencing rising unemployment, and both countries are confronting political upheaval as leaders strain to preserve public benefits.
And there are less direct effects. China’s slowdown is one of the big drivers of the massive fall in oil prices, which hit a 12-year-low on Monday of $31.56 for a barrel of Brent crude, and that is causing its own problems.
Petro-states Saudi Arabia and Russia have both taken massive hits from the collapse in oil prices, and now are facing serious domestic financial challenges as a result. Russia and Saudi Arabia both export about 14 percent of their oil to China, according the Energy Information Administration.
The United States economy, meanwhile, has proven fairly insulated so far, and some industries that operate in China like fast food and retail are expected to stay that way. Still, U.S. stock markets have struggled this year, and many economists warn job losses could begin occurring outside of those already seen in the mining and energy industries if China’s economy worsens. Already, Caterpillar, long a darling of China’s economic growth, selling both to China and to the countries that sold China commodities, has reported declining sales, and its stock price has fallen to its lowest level since 2010. On Monday, aluminum firm Sherwin Alumina Co. filed for chapter 11 bankruptcy.
“A slowdown of half percentage point, or even a percentage point slowdown, is not going to have a very big impact on the U.S. economy. If you’re South Africa or Peru, Chile, Colombia, Malaysia, or Thailand, then it’s a different matter,” said Paul Sheard, chief global economist, Standard & Poor’s Ratings Services.
On Monday, stocks in Shanghai fell 5.3 percent, and they’re down 16 percent in the past six days. Analysts are not particularly worried about the ups-and-downs of the stock market in China, because it only has tangential connections to the economy, but say the volatility underscores deeper fears about whether China’s economic growth is worse than official statistics indicate.
After years of runaway growth, virtually all independent experts agree China’s economy was bound to slow. But the question now is how much the world’s second largest economy will decelerate, from double-digit growth to a stable 6 or 7 percent or a substantially worse 3 or 4 percent – or even lower.
Most hit are those countries that thrived on China’s seemingly insatiable demand for natural resources. Virtually no continent is being spared, and developed and developing countries alike are facing harsh consequences.
As China developed and built the world’s solar panels, laptops and iPhones, it sucked up oil, iron ore, copper and machinery and bid up the price for those raw materials. “So the end of China’s investment boom means the reverse,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management.
