The Bigger Drama: The Transatlantic Community Now Needs to Pay Attention to China

Yixiang Xu

China Fellow; Program Officer, Geoeconomics

Yixiang Xu is the China Fellow and Program Officer, Geoeconomics at AGI, leading the Institute’s work on U.S. and German relations with China. He has written extensively on Sino-EU and Sino-German relations, transatlantic cooperation on China policy, Sino-U.S. great power competition, China's Belt-and-Road Initiative and its implications for Germany and the U.S., Chinese engagement in Central and Eastern Europe, foreign investment screening, EU and U.S. strategies for global infrastructure investment, 5G supply chain and infrastructure security, and the future of Artificial Intelligence. His written contributions have been published by institutes including The Chinese Academy of Social Sciences, The United States Institute of Peace, and The Asia Society's Center for U.S.-China Relations. He has spoken on China's role in transatlantic relations at various seminars and international conferences in China, Germany, and the U.S.

Mr. Xu received his MA in International Political Economy from The Josef Korbel School of International Studies at The University of Denver and his BA in Linguistics and Classics from The University of Pittsburgh. He is an alumnus of the Bucerius Summer School on Global Governance, the Global Bridges European-American Young Leaders Conference, and the Brussels Forum's Young Professionals Summit. Mr. Xu also studied in China, Germany, Israel, Italy, and the UK and speaks Mandarin Chinese, German, and Russian.

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The events in Greece have taken us on an emotional roller coaster in the past week. After missing a payment to the IMF on Tuesday, Greeks voted on Sunday to reject a fiscal proposal by the country’s creditors. Across the Atlantic, all eyes are fixed on the small European nation with a population roughly the size of the state of Georgia and a GDP marginally bigger than Iraq.

In Germany, Angela Merkel has called for new proposals from the Greek government to resolve the debt crisis as soon as possible and to show solidarity within the European community. The United States, concerned with Russia’s recent flirtation with Greece, is also interested in resolving the current crisis without pushing Greece, along with the financial market, into the unknown.

Far from the Acropolis, a bigger storm has been brewing on the eastern edge of the horizon. In the past three weeks, the Chinese stock market plunged, losing over a quarter of its value. Since the market peak on June 12, $2.7 trillion in value, over 11 times the national GDP of Greece, evaporated.

The Chinese government has since taken swift measures to stabilize and revive the market, using every instrument in its disposal, from interest rate cuts to accepting new collateral for share purchases to calming public panic on state media. By Monday, the government’s hasty efforts seemed to have borne fruit, as the Shanghai Composite stabilizes. The underlying problem in China’s economy, exposed by this crisis cast a far darker shadow than the Greek debt crisis for policymakers in the U.S.

It’s no secret that the Chinese economy has been slowing down. The country’s double-digit growth rate in the last two decades is no longer sustainable amid slowing export demand and rising costs at home. The surge in China’s stock market earlier in the year was largely fueled by public impetuosity to speculate. An inflating real estate market, heavily indebted local governments, and low domestic demand break the illusion of a solid growth. The Chinese government seems to rely on ideologies and grand visions, rather than sound economic advice, to cope with slowing growth. Even in the government’s hasty effort to save the market, manipulations are plainly evident.

The likelihood of a significant slowdown or even an economic crisis in China is bad news for the global economy. Heavy losses from the stock market plunge could see a reduction in domestic demand in China, as well as in the country’s demand for industrial commodities, an unwelcome signal for market observers looking for confidence in global economic growth. The crisis in China could also spill over to other parts of Asia, as well as the rest of the world. Stocks in Hong Kong already tumbled, suffering from the collateral damage as mainland brokerages relocate liquidity. A potential financial contagion stemming from the second largest economy in the world would undoubtedly spell disaster for economies elsewhere in the world.

Both Germany and the United States have a big stake in China’s economic stability. Bilateral trade and investment have been increasing since the 1990s. Today, China is Germany’s principal trading partner in Asia and third most important trading partner worldwide. It is the biggest importer of German machinery, cars, and electronic engineering products. A reduction in demand in China could have a significant impact on German exports.

China is also the third largest, and fastest growing, export market for the United States. Its volume has tripled in the last decade. U.S. banks are also much more exposed to China than Greece. The Royal Bank of Scotland estimated recently that the U.S. banking sector exposure to China stands at over $100 billion, while its exposure to Greece is around $12 billion. Data from the Chinese Ministry of Commerce and the United Nation suggest that growing bilateral investment ties between the two countries are now sending more Chinese investment to the United States than U.S. foreign direct investment (FDI) in China. The health of China’s economy is now closely tied to U.S. growth, financial stability, and U.S. jobs.

While the Greek drama is pulling heartstrings and attracting headlines across the Atlantic, we should not neglect developments in China. To do so would be a colossal mistake.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.