The 2 Biggest Economies in the World are Moving In Different Directions

According to Business Insider, experts have analyzed the economic and market outlooks for these two superpowers, underscoring the contrast in their paths.

The International Monetary Fund has responded by raising its global GDP outlook from 2.9% to 3.1%, reflecting the strength of the US economy, Business Insider reports.

Despite all of its issues, the U.S. economy is still the largest in the world. China, however, is failing to catch up despite its growth.

However, the balance of trade in the U.S. has been concerning. For the first time since 2019, the ratio between exports and imports is 40% of exports.

While the U.S. dollar still reigns supreme, China’s growth could threaten the dollar’s dominance in the global market.

Issues such as mounting debt, deflation, and a troubled real estate market have led to a decrease in foreign investment in the country’s financial markets, according to Business Insider.

He said, “A strong US economy buys more foreign goods from China with a stronger US dollar,” which helps sustain China’s manufacturing and exports. However, he also pointed out that China’s policy initiatives are more like “Band-Aids” that fail to address the root causes of its economic issues.

This situation places Beijing in a delicate position as it navigates through its domestic issues and the comparative economic performance of the US.

Economists say that the move will make China’s real estate sector tougher, decelerating the GDP. “All else equal, a flagging Chinese economy may be one of several catalysts that could lead to [a] recession later this year or early next,” wrote Jason Pride and Michael Reynolds, strategists at investment management company Glenmede, in a note Monday (via CNN).

Moya continued: “Overall this is going to lead to a much weaker demand for European and US goods. That will help bring down inflation for a lot of the advanced economies that have been aggressively hiking interest rates.”

The US has seen strong consumer spending, aided by pandemic stimulus checks and unemployment benefits, in contrast to China, where policymakers have been more cautious, focusing on export growth over domestic consumption.

However, economists believe that this spending isn’t likely to continue in the coming months as many households are no longer eating out, traveling, or visiting entertainment venues.

In contrast, China has prioritized export growth, wary of stimulating domestic consumption too much for fear of affecting exports or causing inflation.

The downturn in this sector has had a substantial impact on consumer sentiment and spending, as a large portion of Chinese citizens’ wealth is tied to real estate. Business Insider reports that tumbling property values have led to decreased confidence and increased savings among consumers.

This development complicates the government’s efforts to support the sector and affects over a million people who have paid for homes that have not been built, highlighting the severe challenges in China’s real estate market.

Business Insider reports that high interest rates have affected home buying activity, and the shift towards work-from-home trends has impacted the commercial market. However, experts do not foresee these issues as a systemic threat to the US economy.

US stocks have seen significant gains, whereas Chinese and Hong Kong stocks have experienced a sharp decline, reflecting the exodus of foreign investors and the underperformance of China’s benchmark indexes compared to those of the US and other large economies, as per Business Insider.

Laffer Jr., told Business Insider  “I expect that the Chinese market will bounce around, but that the bias is towards more pain since the problems are systemic, in my opinion. The US, on the other hand, should do well for the 2024 period — strong economy, strong employment, strong earnings, strong dollar.”

Between 2000 and 2021, the size of the Chinese economy grew tenfold. In the year 2000, China had a $1.2 trillion economy and in 2021 it had grown to almost $18 trillion.

According to Econofact, China owes its growth to market reforms and globalization. However, this reliance on the global economy guaranteed that it was bound to come to a halt with an event like the COVID-19 pandemic.

This is at a ratio in 2023 that even exceeds the debt ratio of the United States, which reached 124.2% in December 2023 according to CEIC Data. This debt has been exasperated by overbuilding and overdevelopment of real estate in the country.

The country’s leadership was keen to keep economic growth going ahead at breakneck speeds, which resulted in many companies continually taking out debt to fund the expansion. Now these Chinese companies are unable to make their debt payments as the economy is starting to stall.

In 2008 the number of companies with healthy levels of debt they could pay back was 845. Just a short time later in 2016, that number had dropped to 577, representing a 31.7% decrease.

In 2008, only 262 of these companies had an unhealthy level of debt. This number changed to 395 in just 8 years. The data suggests that two-thirds of corporate debt in the country belongs to Chinese state-owned companies.

They also place blame on the 2018 trade war and the real estate decline of 2021. In response to the outbreak of COVID-19 China instituted harsh public health protocols that severely affected the country’s economy, causing it to slow tremendously.

The country became the epicenter of the pandemic and decided to launch a Level 1 Provincial Response to Public Health Emergency. This is the highest level of response and requires not just patients but suspected patients and any close contacts to be held in quarantine.

According to Chinese Research Center, political pressure eventually forced them to halt these measures, but another spike in cases in 2022 further depressed the economy. It wasn’t until 2023, nearly three years later, that China could begin to recover.

NPR reports that the hundreds of companies that filed for bankruptcy this year are limping along despite the economy doing fairly well.

This growth suddenly halted after the outbreak of COVID-19, according to Chinese Research Center. Economic growth went from 6% per year in 2019 to just 2% in 2020.

The reform has led to an annual growth rate of 10% for 30 consecutive years, which has defied the predictions of economists, according to the Global Development Policy Center.

This leaves the economy dependent on public investment from the government to rekindle and stimulate growth. However, a heavy-handed investment approach has its downsides. Mainly it hurts productivity which will further hinder the recovery.

According to Business Insider, the American Recovery and Reinvestment Act of 2009 delivered $831 billion in aid to jumpstart the economy. China so far has been resistant to a stimulus approach to economic recovery, taking lessons from the American experience and hoping to avoid more ballooning debt.

“This is a direct consequence of U.S. moves to levy Section 301 tariffs on Chinese imports, abuse unilateral sanctions and further tighten up export controls,” Feng said (via CNBC).

As the tariffs raise prices in the U.S., the available quantities of goods and services for U.S. businesses and consumers will be reduced. This will lower income, reduce employment, and, ultimately, hurt the U.S. economy.

“Loose fiscal policy in the United States exerts upward pressure on global interest rates and the dollar,” Vitor Gaspar, director of the IMF’s fiscal affairs department, told reporters. “It pushes up funding costs in the rest of the world, thereby exacerbating existing fragilities and risks.”

However, China does beat the U.S. out in the Agriculture and Industry sectors, with the Agriculture Output of the U.S. only 17.58% of China and 77.58% for the Industry sector.