How China's Economy Collapsing Would Impact the U.S.

After decades of incredible growth, China was widely considered poised to overtake the U.S. as the biggest economy in the world, with its GDP surpassing that of America in the coming 10 to 25 years. But an unexpected slowdown of its economy is now making this increasingly unlikely, experts told Newsweek.

When China ended its COVID-19 restrictions earlier this year, the country's economy seemed to be recovering quickly. But then, in July, that growth was suddenly shown to be slowing down, hitting a slump that has led some to wonder whether the country's economy might be heading towards a collapse.

Last month, China's annual rate of GDP growth appeared to be stabilizing at around 4 percent—a level that's hardly comparable to the growth the country experienced in the past two decades, driven in part by the property development sector.

Rumors about a potential collapse of the Chinese economy are due to deep demand imbalances in the country, said Michael Pettis, professor of finance at the Guanghua School of Management at Peking University in Beijing.

"Chinese growth has slowed sharply even as debt has soared, driven mainly by excessive investment in the property sector and excessive local government spending on infrastructure," he told Newsweek.

Weaker trade, slowing domestic spending, a deepening property sector crisis, deflation, and a weaker currency, together with high youth unemployment, are contributing to the current troubles in the country's economy.

But Pettis doesn't think that China's economy will actually collapse.

"Many analysts have concluded that China is on the verge of a crisis, but they do not understand China's heavily controlled financial system, in which regulators can restructure liabilities almost at will," he said.

"China is very unlikely to suffer from a financial crisis or sudden collapse. Much more likely is many years of slowing growth as it grinds away at debt and slowly rebalances demand towards more consumption and less nonproductive investment."

While the country's economy "may pick up speed temporarily," the overall growth won't go back up to the levels seen in the past decades "until there is a major redistribution of resources from local governments to the household sector," Pettis said. "That means as Beijing tries to rein in debt over the medium and long term, growth rates have to continue slowing."

Where does this leave other world economies, including the U.S.?

"Sluggish growth has implications for global growth, commodity prices, and emerging markets," said Win Thin, global head of markets strategy at Brown Brothers Harriman, told Newsweek.

"With the Eurozone and U.K. also sliding into recession, the U.S. remains the engine of global growth," he added. "If the U.S. goes into recession next year as I expect, then global growth will suffer as China can no longer be counted on to support global trade and activity."

In July, Goldman Sachs cut down the possibility of a recession in the U.S. starting in the following 12 months from 25 to 20 percent, saying that "recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession."

"The U.S. is much less dependent on trade to generate growth and so with a large domestic economy, the U.S. shouldn't be directly impacted by China too much," Thin added. "However, China's major trading partners are already suffering."

According to Neil Shearing, group chief economist at economic research company Capital Economics, the slowdown of the Chinese economy won't have a big impact on the U.S. economy, "unless you get a very, very hard landing in China and the Chinese economy absolutely capitulates—which I don't think is going to happen."

China's growth will continue to slow down "for a very long period of time," Shearing said. "We need to get used to the idea that China probably won't overtake the U.S. as the world's largest economy any time soon, if at all," he told Newsweek.