China's economic crisis will have huge global repercussions

Confidence crisis

China's deflation demonstrates its confidence crisis. The real estate industry contributes to a quarter of China's GDP and constitutes 70% of Chinese citizens' capital. When the sector goes into a slump, the average Chinese citizen feels poorer.

At the same time, China is grappling with double-digit youth unemployment and stagnant wage growth. As a result, the Chinese are tightening their spending. 

Exchange rate stability is crucial as China is trying to secure a bigger role for its RMB currency in global trade, investments, and foreign currency reserves.

The currency depreciation can be attributed to the spike in US interest rates coupled with the massive capital exodus from China in both FDIs and the onshore capital markets over the past few months.

There is no quick fix to China's systemic problems. The Chinese government needs to be bolder in flexing its monetary and fiscal muscles in 2024 to encourage consumption, alleviate local government debt, and, most importantly, create jobs en masse.

Global implications

China's economy will have major global repercussions. While the West has adopted policies to deal with an assertive China over the past seven years, the policy framework does not take into account the challenge of a weakening China.

On the economic front, a weaker China will directly impact the bottom line of global companies that heavily rely on China as a consumer market.

Read more: China must be rescued from economic collapse

China is the world's second-largest importer and the second-largest importer of luxury goods. From Louis Vuitton to Nike, global consumer brands will not see a quick recovery from China as expected.

Some loss of the Chinese market may be more permanent than cyclical. Apple may end up losing much of the Chinese market despite economic recovery.  

China is central to the global supply chain. Removing China from the quintessential global supply chains and rebuilding it elsewhere impose higher costs of geographical reestablishment in markets with less labour productivity and market efficiency.

The costs are borne through the final products by global consumers, adding to persistent pressure on price inflation. The US inflation risks re-spiking when the Fed lowers interest rate this year.

On the geopolitical front, an economically weaker China will be more assertive externally. Nationalist sentiment will grow stronger, diverting the blame for the weakening economy to foreign actors. The tension between the US and China could exponentially worsen. 

However, a weaker China could provide aspiring markets with opportunities to leverage their own labour forces. India, Vietnam, Mexico, and other large Asian markets could be presented with a historic opportunity.