The Federal Reserve Must Pay Attention: China’s Economy Is in Serious Trouble

A disturbing characteristic of Jerome Powell’s Federal Reserve is how US-centric it has become. In following its data-dependent interest rate policy, the Fed makes little reference to world economic developments in general and to those in China in particular. It does so even though those developments could materially impact our economy. This is all the more surprising at a time when China, the world’s second-largest economy and, until recently, its main engine of growth, is in deep economic trouble. It is also surprising when that country appears to be on the cusp of deflation and is causing a marked softening in international commodity prices.

China’s Economy Is in Trouble 

At the heart of China’s current economic malaise is a series of egregious economic policy mistakes under President Xi’s watch. These mistakes include an over-reliance on a credit fueled housing market and export-led economic growth model. They also include an economically disastrous zero-Covid tolerance policy and a heavy-handed clampdown on the all-important tech sector that has undermined investor confidence.

It is also hardly helping matters that China is now paying the economic price for its earlier one-child policy that is now leading to the shrinking of its population. Or that its economic relations with the United States have soured under both the Trump and the Biden Administrations. Nor is it helpful that US and European companies are making serious efforts to reduce their reliance on the Chinese supply chain.