Fed’s Comments on China Stir Concerns Over a Looming Collapse

The Federal Reserve chairwoman Janet Yellen’s unusual comments on China’s economic growth stirred up concerns over a looming collapse of the planet’s second largest economy. Yet, some analysts claim that such scenarios are exaggerated.

But one may argue that Chinese economy had a rough year with production in many industries on a downward trend, and shrinking summer exports and car sales. Moreover, despite economic stimulus China’s central bank had to cut interest rates five times since November.

And on top of that, Ms. Yellen mentioned China during a talk on inflation and federal rate hike with Fed top officials. It is highly unusual for Fed’s discourses to include other economies besides the U.S.’.

“The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect,”

the Fed’s chairwoman said Thursday.

But the slowdown is artificially triggered by Beijing which is now trying to switch from a trade-and-investment-based model to a model driven by domestic consumption to stimulate economic growth.

China now also faces an unemployment problem because the heavy industry can no longer sustain current job numbers due to a slump in manufacturing industry’s demand for raw materials.

Analysts do not expect a collapse but they do not predict a recovery either. Yet, they believe that a Chinese economic collapse is not likely to occur any time soon.

For instance, the country’s benchmark stock market index saw a 40 percent increase from its last year’s levels. Moreover, although, auto sales dropped 3.4 percent last month, the Chinese still purchased 1.4 million vehicles.

Additionally, the GDP is steadily growing at a seven percent rate because unemployment is not that critical as it is in southern Europe where thousands of people lose their jobs overnight due to rapid economic contractions.

But Chinese contraction has broader consequences, at a planetary level. For example, a drop in Australian and Brazilian iron ore demand has already depressed commodity prices worldwide. Meager crude oil prices pushed many countries into recession.

China’s weak demand of goods and services has hit hard Asian neighbors too including Japan and South Korea. But the U.S. is expected to be less affected by the Chinese slowdown. Moody’s Analytics estimates that for every one percentage point lost on economic growth in China the U.S. would see only a 0.2 percentage point drop in its economic growth.

Beijing leaders are now trying to make the transition as smooth as possible even though the Chinese Premier recently described it as “painful and treacherous.”

Image Source: Pixabay