Contrary to what its critics might think, the Federal Reserve is right to be paying close attention to Chinese economic developments. Not only is China now the world’s second-largest economy and a major engine of global economic growth, but China’s economic slowdown is also having a major impact on the formerly very rapidly growing emerging market economies as well as on global financial markets.
Those who criticize the Fed for delaying a start to the normalization of U.S. interest rates due to signs of a Chinese economic slowdown dismiss China as having only a limited impact on the U.S. economy. They argue that while China might account for over 20 percent of overall U.S. exports, this amounts to little more than 2 percent of U.S. gross domestic product (GDP). As such, even if China’s economic growth were a full 5 percentage points below what might otherwise have been the case, all that would do is shave around 0.1 percent off of U.S. economic growth.
In dismissing China’s importance for the U.S. economy, the Fed’s critics overlook the adverse impact that China is already having on the other major emerging market economies, which up until now have been a major contributor to global economic growth. This impact is being exerted by China through a precipitous fall in international commodity prices to levels last seen in the immediate aftermath of the Great Economic Recession of 2008-2009. As a result of this commodity price collapse, together with an abrupt reversal in capital flows to the emerging market economies, major countries like Brazil, Indonesia, Russia, South Africa and Turkey are all now facing acute economic strain.
Full text of this article can be found at TheHill.com.
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