Economics Stack Exchange Archive

What result would a China recession have on the global economy?

• posted by: stevegt on 2012-03-13
• tagged: currency, macroeconomics, markets, central-bank, deflation
• score: 1

Hypothetically speaking, if China were to enter a recession, what result should we expect elsewhere? Does anyone know of any papers that discuss this? (I keep coming up dry – wrong keywords obviously, keep getting results that are more political than professional.)

I think it’s pretty clear that, in this scenario, oil, corn, and other China-imported commodities decrease in US dollar price due to relative supply surpluses. But does that translate into general USD deflation as well? If so, doesn’t that in turn translate into a risk of recession in the US? What about other currencies/countries? I can see that Canada would be at risk, for instance, due to lost oil revenue.

What does China do with its foreign currency reserves? It would seem to me that China stops buying currency instruments, and may need to sell, in order to finance stimulus at home. Unless I have that backwards, this should increase borrowing costs and interest rates in those countries where those currency bonds and bills originate. Does this not translate into a difficulty on the part of those central banks to hold rates down, further increasing their risk of recession? Is there a risk of stagflation once this starts?

Is this all more or less correct? What holes can you see?

Answer 1242

• posted by: Mikael Gislen on 2012-04-17
• score: 1

Some references argues that China is already in a recession. http://finance.townhall.com/columnists/politicalcalculations/2012/02/14/china_enters_into_recession/page/full/

Price of labour is increasing, and this is not only in the coastal areas but even in the inland. If prices of production goes up, demand for Chinese products would go down and this could well lead to a Chinese recession.

One source http://au.ibtimes.com/articles/297458/20120213/china-commodities-energy-metals-grains.htm claims that commodity prices would plummet in case China went into recession, that may have a good effect on the world economy and open up for alternative sourcing of products.

But China is also a big market, and if the local demand increases enough to motivate a continuous growth, then China is also an export destination for

Answer 1113

• posted by: Aarkham on 2012-03-13
• score: -1

If China were to enter a recession there could be a number of effects in the world economy.

• China is a net exporter of labor intensive goods. If it were to reduce exporting then that could ignite inflation in countries that are dependent on China’s products.
• China holds much of the international debt, most notably the American one. As you correctly point out, it would then either stop buying bonds, or start selling the bonds it already holds. This would create a drop in bond demand, lowering their price, and consequently increasing their interest rate. Then the countries whose bonds China held would find geting loans to be much more expensive than before. In order to finance deficits a government could be tempted to issue more money given that the outside market is too expensive, leading to inflation.

These are just some thoughts on what could happen. I think that your reasoning is correct.

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