Washington warily eyes the death of the Chinese economic ‘juggernaut’

Washington warily eyes the death of the Chinese economic ‘juggernaut’
Washington warily eyes the death of the Chinese economic ‘juggernaut’

The Chinese economy faces stiff headwinds including a slumping housing sector, heavy government debt loads and rising unemployment, and US policymakers are taking notice.

“Over the past few months sentiment in China’s economy has grown increasingly negative,” said Republican Rep. French Hill of Arkansas at an event on China’s economic outlook at the Center for Strategic and International Studies on Tuesday.

Hill, a member of the House Permanent Select Committee on Intelligence, is vice chairman of the House Financial Services Committee and is a former US Treasury official.

He moderated a panel with China experts who argued that China’s economic woes must be studied closely by US policymakers as they navigate complicated topics like the future of Taiwan.

A year ago, “the assessment here in Washington was that China was on a trajectory of galactic domination, that the economy was a juggernaut, and now we’re having a much different conversation,” said Jude Blanchett, a CSIS China expert.

China’s housing sector has been a “major drag” on the Chinese economy in recent years, according to a Tuesday research note published by Haibin Shu, chief China economist at JP Morgan.

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He wrote that the “prolonged weakness” in the housing sector is two-sided, with consumers reluctant to buy homes because they expect prices to continue to fall, while home developers are stuck with an oversupply of housing units.

Net investment in real estate infrastructure is now negative, and a sector that was once the biggest driver of Chinese growth is becoming a drag, according to Shu.

“The structural slowdown we’re seeing in China right now is the byproduct of the end of an unprecedented credit and investment bubble,” said Logan Wright, director of China markets research at Rhodium Group, at the CSIS panel.

Chinese equities have also suffered this year, with the China CSI 300

XX:000300 index declining 9.1% year-to-date.

Market observers are coalescing around a narrative that China’s economic struggles are causing Chinese President Xi Jinping to contain his ambitions with respect to Taiwan, after the Chinese leader gave a speech in San Francisco earlier this month pledging that his country “will never pursue hegemony or expansion , and will never impose its will on others.”

The speech followed a meeting between President and Xi, where the leaders agreed to restart high-level military-to-military communication in an effort to avoid misunderstandings over Taiwan or other areas of potential conflict.

“China’s economy is in deep trouble,” wrote Ed Yardeni of Yardeni Research in a Tuesday note to clients. “The good news is that it might stop Xi and his CCP comrades from invading Taiwan anytime soon.”

Blanchett argued that it is impossible to know what impact China’s economic slowdown will have on its international ambitions, saying that it is “plausible” that domestic turbine could motivate Xi to invade Taiwan as a means of uniting the nation behind the Communist Party.

Rep. Hill pointed out that the economic consequences of an invasion could be felt most by China itself.

“If there’s a military action across the Taiwan Strait, it causes an immediate global depression, not recession, with the epicenter in China,” he said. “It’s nonsensical for a rational thinker.”

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