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Six Charts Explain Why China's Slowing Economy May Worsen U.S. Inflation

China's lockdown, manufacturing costs, and supply-chain problems may aggravate U.S. inflation.

Credit: Ian Taylor on Unsplash

The economies of the United States and China are inextricably linked. China is the top exporter to the U.S.

China's zero-COVID strategy includes severe lockdowns to control the spread of the virus. The recent lockdowns are slowing down all sectors of the country's economy and worsening supply chain bottlenecks worldwide.

Beijing recently placed Shanghai, with 28 million people, under complete lockdown. Shanghai is the world's largest container port. It processes roughly one-fifth of China's exports. The lockdowns have led to a slowdown of operations in the Port of Shanghai. Cargo is piling up as hundreds of ships are waiting to load or unload.

China may also put Beijing, which has a population of 21 million people, under lockdown.

China's Slowing Economy

Between 2010 and 2019, China's average annual growth rate was 7.7%.  Amid the pandemic slowdown in 2020, the GDP fell to 2.3%. But, in 2021, the growth bounced back to 8.1%. The official growth target for China for 2022 is 5.5%.

Chiina GDP Growth

The Chinese economy is facing crippling shocks due to coronavirus lockdowns, a real-estate meltdown, and the impact of Russia's invasion of Ukraine.

The chart below shows the 2022 forecasts by five agencies and brokerages. Earlier this year, their average growth forecast for 2022 was 4.7%. Recently they revised the forecasts, and now the average is 4.3%. IMF revised its forecast from 4.8% to 4.4%.

Growth forecast

China's Manufacturing Inflation

China's factory-gate inflation rose to 13.5% in October 2021, the fastest rise since China began providing such data in October 1996. Factory-gate prices are wholesalers' prices at the manufacturer's door and do not include shipping and handling costs.

In March 2022, the year-over-year increase of the Producer Price Index (PPI) was 8.3%, the lowest since May 2021. Yet, the monthly increase of 1.1% in March, the highest in the past five months, reflects the recent lockdowns and supply-chain bottlenecks. The average monthly increase over the past 12 months was 0.93%.

Chinese manufacturers are unlikely to absorb the increased costs and instead pass them on to American consumers. The ripple effect could add to the United States' high inflation woes.

China PPI

U.S. Dependence

China leads the list of countries from which the United States imports goods. Imports from China totaled $506 billion in 2021, up from $435 billion in 2020, an increase of 16.3%. Exports to China in 2021 were $151 billion, up from $125 billion in 2020, an increase of 20.8%.

U.S.- China trade

In the first few months of 2022, China took the top spot of exporters to the U.S., followed by Mexico and Canada. The three countries accounted for 45% of U.S. imports, with China's share at 18.1%, Mexico at 14.3%, and Canada at 12.8%.

U.S. imports Year to date

The U.S. relies on China for a wide variety of goods. America imports low-tech products like textiles and apparel, furniture, plastics, and paper products. China also supplies high-tech products like communication equipment, semiconductors, and precision instruments. Imports include automotive parts, chemicals, and metals in the medium-tech product range. The United States also depends on China for critical drugs and rare earth minerals.

Imports from China - 2021

According to estimates, Chinese imports account only for 5% of American spending. Though it looks like a small amount, it is deceiving. For example, supply chain bottlenecks have led to chip shortages limiting automobile production. The scarcity has led to 40% inflation in used car prices.

Globalization has its downside, as the pandemic has explicitly demonstrated. The U.S. must strive to bring back the manufacturing of critical items. Many drugs manufactured in the United States use raw materials from China. Drug shortages can trigger a health crisis, a national security issue. Further, in times of a military conflict, the dependencies could have national security implications.

Let's assume that the cost of raw materials continues to increase for China's manufacturers due to supply chain issues. In that case, China's producer price inflation may worsen in the coming months. Net effect, consumers in the United States, will have to pay a higher price for Chinese-made goods.

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