China’s Money Crunch

In recent years, China has made one of the most remarkable transformations in history—from a poor, unstable nation into an economic giant. Since 1978, more than 500 million Chinese—nearly one third of the country’s current population—have been lifted out of poverty. Experts predict that by 2026, China’s economy will replace America’s as the world’s largest.

Yet China today is in the midst of an economic slowdown and facing monumental changes. A construction boom of skyscrapers, houses, and other projects has slowed. Some of the many manufacturing jobs that had moved to China from other countries—possibly millions from the U.S. alone—are leaving for places such as Vietnam where labor is cheaper. Businesses are firing workers and closing factories. Companies that borrowed lots of money are struggling to pay their debts.

The impact of the slowdown is also being felt far from the country’s borders. In August, a one-day plunge in China’s stock market sent shock waves worldwide. Many of the U.S. companies that do business in China have been watching the situation nervously.

Liang Jianhui, a butcher in the city of Guangzhou, is one face of China’s changes—the good and the bad. 

“We used to live in the countryside [when I was a boy], and we didn’t have a full stomach,” Liang recently told The New York Times. “We just ate porridge every day.” Then Liang’s family moved to Guangzhou, started a business selling meat, and began to flourish. “We could sell seven pigs in one morning,” he recalled. “That was the greatest time.”

But today, Liang is feeling the slowdown. Meat is a luxury for many middle-class Chinese, and because money is tight, they are buying less. “Now we sell two pigs a day,” Liang said.

Because many Chinese people, like Liang and his customers, have less money to spend, foreign companies that count on China’s huge market of consumers are hurting. In the U.S., General Motors and Ford are now shipping fewer cars and trucks to China. 

As a result of the slowdown in building, China’s companies need fewer construction materials. That affects the many businesses that export materials to China. For example, the U.S. construction-equipment corporation Caterpillar recently announced it will cut up to 10,000 jobs, in part because of falling demand for its trademark yellow bulldozers and excavators. 

The situation is especially troubling for developing markets in South America and Africa that have counted on China’s huge appetite for food and minerals. Brazil’s recent economic success, for example, has been based on exporting iron ore, beef, and oil to China. Today, all of that is in danger. 

“The entire world is focusing now on China, watching this crisis unfold,” Brazil’s minister of development and trade told reporters. 

Modern China’s rise began in 1978, under the country’s then-new head, Deng Xiaoping. The economy Deng inherited from Mao Zedong, leader of the Communist Revolution of 1949, was in ruins. Millions of Chinese had starved to death from famine. And under the thumb of a repressive government, China was isolated from much of the world.

Although Deng maintained the Communist Party’s strict political control, he embraced elements of a Western market economy—privately owned businesses and the competition between them. The policy departed from the Communist system, in which the government controls all businesses. 

Deng’s methods were wildly successful. Countries rushed to do business with China. Electronics firms like Apple took advantage of its skilled workers. Clothing manufacturers relied on its huge, low-paid workforce. Walmart and other retailers stocked their shelves with cheap sneakers, sweaters, and toys—and consumers snapped them up. Sometimes it seemed like everything in the U.S. was made in China. At the same time, Chinese companies bought up resources and businesses worldwide at a pace that appeared unstoppable.

Today, the outlook is suddenly different. Why? Barry Naughton, an economist at the University of California, San Diego, says a slowdown is natural. “Economies can go through miracle growth phases,” he says. “Now that phase is over.”

Today, China is the third-largest consumer of U.S. goods. “Many American corporations see China as fundamental to their growth,” Naughton says. For example, Yum! Brands, which owns KFC and Taco Bell, made half of its sales in China last year. These companies will adapt, Naughton believes. Their growth will be less rapid, but it won’t stop. The damage to the U.S. economy overall will be limited. 

It’s nations like Brazil that have relied too much on China’s deep pockets that will suffer, Naughton says: “[They] just assumed that the party would go on forever.” 

What about China itself? Some experts say that Communist control stifles the freedom that’s needed for long-term prosperity. Yet economist Peter Hilsenrath of the University of the Pacific writes that China already has a “vibrant middle class” with something close to the American Dream of “a nice home, car, and college education for their children.” The question is, will people like Liang Jianhui continue to have access to that dream? 

We don’t know yet, Naughton says. Even so, he believes China’s economy won’t collapse. Growing slower, it will probably take longer to catch up to America’s. “But,” he says, “it will happen eventually.”