News headlines about China, both economically and politically, have increased as of late. Items such as a ban on iPhones for government-backed agencies, China skipping the G20 summit, and evidence of a sluggish Chinese economy have been front and center in the news cycle recently. The attention to activities in China does make sense, as they are an important player on the world stage with the second largest economy (the US is still #1). China’s direct impact on US economic conditions, and their relative importance to US growth, is less clear than it has been in the past.
As seen in the chart below, China has been growing their GDP growth rate by more than their official target of 5% (yellow line) for the past several decades1. Since 2000, the average GDP growth rate has been 8.4%. In two of the last three years, however, Chinese GDP growth has been below target (red box) and estimates from JP Morgan suggest the next two years will also be below target (blue box).
Regarding GDP growth estimates, the US and China have been going in different directions. China GDP forecasts have come down while the US numbers have been increasing. There is even some speculation that the US could grow faster than China in 2023, which hasn’t happened in the last 25 years2,3 (see chart below).
Another way to judge the economic relationship between US and China is to examine trade, or simply how much the countries import and export with one another. China does buy US goods, but they rank third for US exports behind Canada and Mexico, purchasing 7.6% of US exports4 (see graph below). While China is not insignificant for purchasing US goods, they are not a trade partner who is so large they can solely dictate the direction of the US economy.
Historically, the US has imported a significant amount of goods from China and at one point reached nearly 25% of imported goods in 20155 (see chart below). The latest US import trade data shows China now ranks behind Mexico as a trade partner for imported goods.
One factor for this dynamic is a US/China trade war that started in 2018. The trade war elevated China’s risk level as a trade partner, causing the US to focus on reshoring goods production. These actions brought manufacturing back to the Americas, not only the US but also Mexico and Canada, due to their geographic proximity and healthier geopolitical relations.
Clearly, China’s growth has been slowing while the US economy has proven resilient. As a result, China has facilitated actions to accelerate their local economy and, at the same time, relations with the US government and US companies have become more volatile. Investors are keenly focused on the growth of China, with a specific concentration on how economic trends there could affect US businesses reliant on Chinese goods and/or Chinese consumers. A less discussed but potentially positive outcome of a slower growing China is the potential for less inflationary pressure on global goods, like crude oil. High oil prices generally act as a consumer tax as transportation costs rise without a significant benefit outside of energy companies, so a slowing Chinese economy could possibly create a better situation for US consumers.
The age-old adage is when the US (or China) sneezes, the rest of the world catches a cold. This may still be the case, but with the recent resilience of the US economy alongside a slowing Chinese economy, this might indicate the impact of catching that cold could be less severe than in the past.