OPINION
PAUL
KRUGMAN
How Scary Is China’s Crisis?
Aug. 21,
2023
https://www.nytimes.com/2023/08/21/opinion/columnists/china-financial-crisis-economy.html
Paul
Krugman
By Paul
Krugman
Opinion
Columnist
The
economic travails of the postpandemic years have led to intense intellectual
and policy debates. One thing almost everyone agrees on, however, is that the
post-Covid crisis bears very little resemblance to the global financial crisis
of 2008.
So, sure
enough, China — the world’s biggest or second-biggest economy, depending on how
you measure it — seems to be teetering on the edge of a crisis that looks a lot
like what the rest of the world went through in 2008.
I’m not
confident enough in my understanding of China to judge whether it will manage
to contain its Minsky moment, the point at which everyone suddenly realizes
that unsustainable debt is, in fact, unsustainable. In fact, I’m not sure if
anyone — including Chinese officials — knows the answer to that question.
But I think
we can answer a more conditional question: If China does have a 2008-style
crisis, will it spill over in a major way to the rest of the world, the United
States in particular? And there the answer is pretty clearly no. Big as China’s
economy is, America has remarkably little financial or trade exposure to
China’s problems.
Before I
get there, let’s talk about why China in 2023 resembles the North Atlantic
economies, both America and Europe, in 2008.
The 2008
crisis was brought on by the bursting of a huge, trans-Atlantic housing bubble.
The effects of the burst bubble were magnified by financial disruption,
especially the collapse of “shadow banks” — institutions that acted like banks,
created the risk of what amounted to bank runs, but were both largely
unregulated and lacking the safety net provided to conventional banks.
Now comes
China, with a real estate sector even more swollen than those of Western
nations in the run-up to 2008. China also has a large, highly troubled
shadow-banking sector. And it has some unique problems, notably huge debts owed
by local governments.
The good
news is that China isn’t like Argentina or Greece, nations that owed large sums
to foreign creditors. The debt in question here is, in essence, money China
owes to itself. And it should in principle be possible for the national
government to resolve the crisis through some combination of bailouts of
debtors and haircuts for creditors.
But is
China’s government competent enough to manage the kind of financial
restructuring its economy needs? Do officials have sufficient resolve or
intellectual clarity to do what needs to be done?
I worry
especially about that last point. China needs to replace unsustainable real
estate investment with higher consumer demand. But some reporting suggests that
top officials remain suspicious of “wasteful” consumer spending and also balk
at the idea of “empowering individuals to make more decisions over how they
spend their money.” And it’s not reassuring that Chinese officials are
responding to the potential crisis by pushing banks to lend more, basically
continuing along the path that got China where it is.
So China
may have a crisis. If it does, how will it affect us?
The answer,
as far as I can tell, is that America’s exposure to a potential China crisis is
surprisingly small.
How much
has the United States invested in China? Direct investment — investment that
involves control — in China and Hong Kong is about $215 billion. Portfolio
investment — basically stocks and bonds — is a bit more than $300 billion. So
we’re talking around $515 billion in total.
That may
not sound like a small number, but for an economy as big as ours, it is. Here’s
one comparison. Right now, there are many concerns about U.S. commercial real
estate, especially office buildings, which probably face a permanent reduction
in demand because of the rise in remote work. Well, U.S. office buildings are
currently worth about $2.6 trillion, or around five times our total investment
in China.
Why has a
huge economy attracted so little U.S. investment? Basically, I’d argue, because
given the arbitrariness of Chinese policy, many potential investors fear that
the nation may be a kind of Roach Motel: You can get in, but you may not be
able to get out.
What about
China as a market? China is a huge player in world trade, but it doesn’t buy
much from the United States — only about $150 billion in 2022, less than 1
percent of our G.D.P. So a Chinese slump wouldn’t have much direct effect on
demand for U.S. products. The effect would be larger for countries that sell
more to China, like Germany and Japan, and there would be some ricochet effect
on America via sales to these countries. But the overall effect would still be
small.
A Chinese
economic crisis might even have a small positive effect on the United States,
because it would reduce demand for raw materials, especially oil, and as a
result possibly reduce inflation.
None of
this means that we should welcome the possibility of a Chinese slump or gloat
over another nation’s troubles. Even on purely selfish grounds, we should worry
about what the Chinese regime might do to distract its citizens from domestic
problems.
But in
economic terms, we seem to be looking at a potential crisis within China, not a
2008-style global event.
Paul
Krugman has been an Opinion columnist since 2000 and is also a distinguished
professor at the City University of New York Graduate Center. He won the 2008
Nobel Memorial Prize in Economic Sciences for his work on international trade
and economic geography. @PaulKrugman
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