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Buckle up: China’s economic downturn headed for US
January 18, 2016, 5:25 am

There is good reason to believe that China’s economic slump may be heading for the United States. Economic growth remains anemic in most of the developed world, and data from key economic sectors like manufacturing and transportation forecast upcoming trouble in the U.S. market. It should come as little surprise that economic stress is rising after China’s mid-2015 market crash. China and other emerging markets accounted for the vast majority of global economic growth in the wake of the 2008 crisis. However, a look at history suggests that both the U.S. and China can trace their recent troubles to structural issues in the global economy that will not disappear any time soon.

As we enter 2016, a wide range of indicators point to a difficult year ahead for the U.S. economy. Indices that measure the strength of the manufacturing sector are showing a contraction, and the construction and transportation industries are experiencing similar troubles. Both profit margins and sales are declining for U.S. companies.

The Federal Reserve’s decision to raise interest rates in this environment makes it seem unlikely that the U.S. stock market will rise above its record highs. Altogether, the chances of a recession in the United States appear to be on the rise. The mid-2015 Chinese stock market crash seems to have provided the catalyst for recent troubles.

In October, the IMF warned of a rising risk of a global recession as a result of slowing growth in China and other emerging markets. These difficulties threaten the global economy because China has been a major source of demand for many commodities, particularly in the post-2008 world. Shaky Chinese financial markets have also prompted turbulence in the global economy.

On January 4th, major routs in the Chinese stock exchanges prompted significant sell-offs in the American and European markets. The seeds of the 2015 Chinese crash were sewn by the rapid expansion of the Chinese equity and real estate markets and shadow banking system in recent years. The rise of these bubbles can be traced to the global economic crisis of 2008.

In 2015, retail sales grew by only 2.1 per cent, a marked difference from the 3.9 per cent in 2014 [Xinhua]

In 2015, US retail sales grew by only 2.1 per cent, a marked difference from the 3.9 per cent in 2014 [Xinhua]

As the global economy entered a prolonged recession, central banks responded by injecting massive amounts of cheap credit into the financial system. The U.S. Federal Reserve, European Central Bank, and the Bank of Japan all took the nearly-unprecedented step of directly buying financial assets on the open market.

However, this injection of money did not generate a sizable wave of productive investment or restore full employment. Instead, much of it poured into financial assets, insurance, and real estate (FIRE). Central bank policy in the developed world encouraged the creation of dangerous bubbles in emerging markets, including China. As money poured into local real estate and equity markets, firms and individuals took on increasing amounts of debt to fund everything from residential construction to share purchases.

These investments were based on an unrealistic expectation of ever rising prices encouraged by a global glut of cheap credit. When the bubble popped in the summer of 2015, these prices dropped precipitously. Hundreds of billions of dollars in capital rushed out of China. Altogether, almost one trillion dollars fled emerging markets in the year leading up to September 2015. By taking the long view, it quickly becomes apparent that the 2015 Chinese crash was not an isolated event. Rather, the 2015 crash was a direct product of the crisis of 2008, which was itself the result of a bubble in FIRE assets. We can identify a wave of capital flowing in and out of the developed and developing world respectively, searching for higher yields in the wake of collapsing asset bubbles. This suggests that the 2008 and 2015 crashes are not anomalous events, but the products of a structural trend in contemporary capitalism that encourages the creation of speculative bubbles.

To understand this story fully, we have to go back to the end of the post-war boom in the early 1970’s. Industrial capital had re-accumulated in the United States, Europe, and Japan following the devastation of the Second World War. Facing a lack of opportunities for profitable investment in traditional sectors, capital increasingly began to flow into FIRE assets.

This began the decades-long process of financialization, with all of the consequences that we are now familiar with. However, the post-1970 world could still look forward to the entry of most of the globe into the world market, including future economic giants like China.

Today, there are fewer outlets for investment, and even the Chinese economy is undergoing its own process of financialization. Contemporary capitalism thus seems to face an impasse. It is clear that the structural conditions that create dangerous, destabilizing bubbles – most importantly, capital over-accumulation – have not gone away. Indeed, they may be more powerful than ever.

It is difficult to model how contemporary capitalism might solve this problem. The Great Depression, which Keynes described as a consequence of capital over-accumulation, was only solved as a result of the destruction of the Second World War. Japan has yet to achieve steady medium-term economic growth in the years since the collapse of its massive asset bubble at the beginning of the 1990’s. Many economists, like Larry Summers, seem to believe that steady growth, full employment, and financial stability are no longer feasible targets for developed economies. Absent major economic restructuring, we seem condemned to continue the current cycle of short-lived booms and devastating busts.

Let’s hope that the upcoming recession provides a new opportunity to consider alternatives. For now, expect rough waters ahead.


This article first appeared in China-US focus.

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.

5 Responses to Buckle up: China’s economic downturn headed for US

  1. Tim Reply

    January 18, 2016 at 4:09 pm

    I question if anyone is seeing the real picture here. China didn’t suddenly have a economy that turned south that threatens other economies.
    Its the other way around. In other words, we are not buying, so China is not manufacturing. We are in a world wide recession. The shipping indexes (Baltic dry index, Railroad and trucking metrics) will back this all up. Despite what the U.S. government is trying to do we have a ‘glut’ of oil and raw materials. And our markets bad. Labor participation rate is lower than the 70’s, Baltic dry index (Shipment of raw materials)is the lowest since it started in the early 80’s. Home ownership is the lowest from since the 70’s. Don’t take my word for it, arm yourself with the knowledge and look it up yourself.

  2. Tom Young Reply

    January 18, 2016 at 7:18 pm

    Traditional theories of closed economies do little to predict
    future or expain the global economy. Being an engineer and having
    created models of bioreactor in differential equations taking
    data of the real systems I have done the same for data on the
    internet and come to several conclusions after creating a arithmetic model of the global economy that describes qualitatively
    the driving forces affecting flow of trade from EU US and BRICS.

    Fundamental is the measure of competitivity which is simply
    the economy’s productivity divided by the median income.
    US 115,000/28,000 vs China 24,000/4000. This is to say productivity is factored by cost of labor. Beyond that
    the cost of government (administrative cost of economy)
    is discounted from competitivity of to get that of private sector.

    US 42% EU 42% PRC 23% (public sector is profit driven too)
    This makes China very competitive in PPP about
    twice US competitivity and flow of 4.6 trillion exports
    from BRICS in 2014, The PPP value of dollar is taking a beating with dumping of US bonds into global pool and push to sell to
    US real goods for reserve currency paper is much reduced
    (US crutch is gone). Buying power of US is shot and imports but half trillion/year 2015 as overflow of money supply means inflation of the dollar in the global market.

    Concept of economies as compound interest accounts in a bank are
    not a realistic concept of the real thing which is a bioreactor
    with a trillion microbes growing on a limited amount of natural
    resources as is earth with 7 billion people. Taken as nations
    or as the total global GDP of about 100 trillion it is pure
    folly to expect exponential growth at a fixed interest rate
    raising for example 1.1 to the Nth power where N is the number of years for a century and then abruptly hitting a brick wall. Far more realistic observers see a gradual reduction in the power from 9 to 8 to 7 and so on in asymptotic approach toward a maximum including all possible value added to basic raw materials. Nations are competing for a share of this total and East is beating West big time now in catch up post Deng. If children replace parents population and demand for human needs is fixed we can demoted Malthus to a closet. May the altruistic nature we can be prevail in us and prove our cognition worth a cup of coffee and prosperity be shared when we get to that day and all people have their needs and opportunity to be all they can be based on their intelligence and hard work. Looking forward She Yun soon near me for inspiration to make it until

    The absolute growth year on year should form a line sloping
    upward if the Three big economies are healthy and compound
    interest concept of economies should go the way of physicians
    bleeding people to cure illness in a biochemical engineer’s
    opinion. Hang in there PRC you likely already know you are
    doing great and 7% at 17.8 trillion USD PPP is amazing.
    If NYSE blames you for sell off it just gambling house “spin”.

    Oriental in heart Oxidental by birth

  3. Louis Robert Reply

    January 19, 2016 at 12:34 am

    “China’s economic downturn headed for US”?


    The Empire’s economic downturn is its very own, neither China’s heading west, nor the effect of China’s. In actual fact, causality here operates the other way around. The source of the current economic downturn in the West originates from the Empire’s 2008 crisis and lies in the depression that ensued, and that is still with us. The West never came out of that ever spreading and deepening depression that it has now come to be felt more acutely still in Asia, including in China.

    Make no mistake: China has no obligation to, and certainly will not run a balance of payments deficit just to please the Empire and the West by contributing to their economic growth at its own expense. China, it’s leaders and the Chinese people have far too much their interests at heart to sacrifice them on the West’s imperial altar. In other words, either the Empire and the West wifl solve their own problems by themselves… or they’ll eventually collapse without China’s help.

    The era when the Empire and the West could live off the rest of the world is over. A new world order is very much in the making, as is a multipolar world, nothing short of ONE world for ALL. The West better adapt soon to these new realities, for time is fast running out.

  4. JOHN C DURHAM Reply

    January 21, 2016 at 7:00 pm

    It has been noted by the most informed that the downturn in the US has brought the downturn in China. You may have it backwards. I’m in America. I can assure you that we have been in a Depression since 2008. And, it’s not getting better. The conditions remain unchanged. All reports to the contrary are fixed to keep (a few) insolvent banks afloat.

    It would be irrational to suppose that a nation like China, productive, investing in its infrastructure, carrying no net debt with enough gold held broadly to place it at any time behind its currency is the cause of any problems for anyone but speculators.

  5. Doug Sagal Reply

    February 18, 2016 at 3:28 am

    The information above is some of the best I have seen .I have been to China doing business and from what I see they have a higher consciousness for social well-being this affects their economic growth and way of doing business. They have some old school problems as a result of the mow air ( he was a bad apple) leaving china’s people with disabilities to think out of the box .the us has greater inventor skills and very few social well-being directions. The way the Indians were handled effects there business consciousness and it needs a upgrade to deal in global affairs .These problems effect economic climate that effects all parties. The Indians had a consciousness with the earth that has been over looked that in now effecting everyone in the form of climate change. This is part of economic change that is going on

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