The People’s Republic of China flag and the U.S. Stars and Stripes fly along Pennsylvania Avenue near the U.S. Capitol in Washington during Chinese President Hu Jintao’s state visit, January 18, 2011.
An economic crisis in China is unlikely to have major impact on the US, Paul Krugman said.
That’s because the US has limited exposure to China in investments and trade.
A crisis could actually benefit the US by lowering inflation, according to the top economist.
The risk that an economic crisis unfolding in China could spill over to the US is actually “surprisingly small,” according to top economist Paul Krugman.
“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,” Krugman said in an op-ed for the New York Times on Monday.
For one, the US has very little exposure to China’s economy, both in terms of investment as well as trade.
Direct US investment in China and Hong King hovers just around $215 billion, meanwhile US portfolio investment, which includes stocks and bonds, is just around $300 billion.
In total, that’s around 2% of the US’s $26.8 trillion GDP over the second quarter. It’s also just a fifth of the value of US office buildings, which is around $2.6 trillion.
And though China is straddled with huge debt burdens, most of that is owed to itself, Krugman said, adding that Beijing could resolve the problem via debtor bailouts and creditor haircuts.
Meanwhile, China’s imports from US totaled $150 billion in 2022, or less than 1% of US GDP. Germany and Japan would face greater risks from lower Chinese imports. There would be some “ricochet effect” on the US, but that would also be small, he added.
In fact, an economic crisis in China could slightly benefit the US, if reduced demand for commodities helps ease prices and inflation.
“None of this means that we should welcome the possibility of a Chinese slump or gloat over another nations troubles,” Krugman said. “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.”
But experts have warned trouble could stretch out over the long-term for China. The country faces poor growth prospects and is being weighed down by an aging population, which could shrink its workforce and keep its economy from surpassing the US, according to one consultancy firm.