Risk or opportunity? Outcomes for China amid fears of US recession

Global stock markets, particularly those in Asia, experienced a significant downturn on 5 August 2024, with the Nikkei 225 Index shedding 12.4%, its worst day since the 1987 Black Monday crash. A confluence of factors, including fears of a US recession, had triggered a massive sell-off in stock exchanges worldwide.

The ripple effects of a potential US recession are profound and far-reaching. As the US is a major consumer and importer, a slowdown in the American economy can significantly dampen global demand, impacting export-oriented economies in Asia, which rely heavily on the US market. This is particularly concerning given that the US accounts for a substantial share of many Asian countries’ exports. According to the World Bank, the US accounts for more than 15% of China’s and South Korea’s exports. A decline in US demand would translate to a significant hit on the export revenues and GDP growth of these countries.

Moreover, a flight to safety by global investors seeking refuge from a US recession could trigger capital outflows from emerging markets, further destabilising their economies. This phenomenon, known as “risk-off” sentiment, is not without precedent. During the 2008 global financial crisis, emerging markets experienced significant capital flight as investors sought safer havens, leading to currency depreciations, higher borrowing costs and economic instability. A similar scenario could unfold if fears of a US recession intensify, causing investors to pull out of emerging markets like those in Asia, and park their money in safer assets like US treasuries and gold.

China, the world’s second-largest economy, is particularly vulnerable to these developments. The country is already grappling with its own set of economic challenges. Recent GDP figures from the National Bureau of Statistics of China have revealed a slowing growth rate, missing the government’s target.

The property sector, a major growth driver, is facing a severe debt crisis, with major developers teetering on the brink of default or already undergoing liquidation in the case of Evergrande. This has raised alarms about the stability of the entire sector, which accounts for a significant portion of China’s GDP. The Evergrande crisis is not just a company-specific issue — it reflects deeper structural problems in the Chinese economy, such as overreliance on debt-fuelled growth and a property bubble that has been inflating for years.

Escalating trade tensions with the US further complicate the situation. Tariffs and trade restrictions imposed by both countries have disrupted supply chains, increased costs and dampened economic activity. A US recession could exacerbate these trade tensions, leading to a further decline in Chinese exports and a deeper economic slowdown. The tit-for-tat tariffs have created uncertainty for businesses, increased costs for consumers and slowed global trade.

Despite the widespread downturn in global markets, China’s A-shares have remained relatively resilient. In contrast to the mayhem elsewhere, the Shanghai and Shenzhen bourses on 5 August 2024 dipped narrowly by 1.54% and 1.85% respectively, reflecting investor confidence in major Chinese businesses. A-shares are the stock shares of mainland China-based companies that trade on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

While uncertainty still pervades the Chinese property market, Beijing has intervened with an unprecedented series of measures to stabilise the sector. The People’s Bank of China has removed the nationwide minimum mortgage interest rate, at the same time cutting the minimum downpayment ratio for first-time buyers to 15% and 25% for second homes, down from the previous ratios of 20% and 30%. This demand-side monetary easing is anticipated to curb falling prices.

On top of injecting liquidity into the debt-ridden industry, local governments are also encouraged to buy back idle land to redevelop them into affordable housing. Though the Chinese property market has yet to turn the corner by a long shot, these interventions hold the potential to put the sector on a more stable and sustainable footing in time to come.

Beyond real estate, the Chinese government has additionally attempted to rebalance the economy by shifting from heavy reliance on property, infrastructure and manufacturing to pivot to financial services, technology and other activities higher up the value chain.

A massive stimulus package to the tune of 1 trillion RMB (US$141 billlion) worth of sovereign bonds were issued in May earlier this year to fast-track progress across a wide spectrum of sectors including research and innovation in science and technology, integrated urban-rural development, coordinated regional development, food and energy security, and high-quality population growth.

Meanwhile, sweeping stock market reforms driven by Beijing could eventually lead to a more transparent capital market which could prove attractive to foreign dollars.

It is still early days to decide whether the stock market slump of 5 August is a precursor to a full-blown economic recession or just a temporary market correction. But in the event of a hard landing, where the impact of a US recession percolates worldwide, a Chinese economy that can get its act together could position itself as a viable destination for capital.

Related: China’s stock market a bright spot as Asia’s market tumbles | Beijing’s repositioning of the real estate market is a risky endeavour