Will Fed Be Spooked by Specter of Chinese Recession?
New York (Sept 10) With the slowdown in China's massive economy already wounding emerging markets, can increasing pain for developed nations be far behind?
It's a risk that preoccupies central bankers and market analysts alike as the Federal Reserve prepares to consider raising interest rates in the U.S., the only economy bigger than China's, after holding them near zero since the 2008 financial crisis. China's purchases from the U.S. are limited, but it's a large importer of raw materials such as copper and oil from developing nations such as Brazil, which heightens the importance of its economic health to global markets that trade with the U.S.
"Increased anxieties about prospects for China and other emerging markets had underlined the downside risks to global activity," members of the Bank of England's monetary policy committee noted in a meeting this week where they shied away from raising the country's bank rate.
Specifically, committee members cited signs last month that China is faltering, including a devaluation of its currency and an 8% drop on the Shanghai Stock Exchange that dragged down equity prices in both emerging markets and developed ones like the U.S., the U.K. and the Eurozone.
Must Read: An ATM Worth Switching Banks For? JPMorgan Thinks So
"China's sizable standing in the world economy -- its shares of world imports had risen steadily over the past decade or so, to around 10% -- meant that demand prospects there were significant for the health of the global outlook," the central bank said in meeting minutes released on Thursday.
Such concerns are similar to those voiced by Richard Dudley, who as New York Fed president is a voting member of the Federal Open Market Committee that sets interest rates in the U.S. The committee is relying on broad economic data -- not just developments inside the U.S. -- to make the decision, he said in a news briefing in late August.
Growth in China, the world's second-largest economy, has become a revenue driver for U.S. companies from computer-maker Apple (AAPL - Get Report) to plane-manufacturer Boeing (BA - Get Report) . Concerns about China's performance helped wipe out more than 6.6% of the Dow Jones Industrial Average's value over a two-day period in August.
China's size alone makes its challenges significant to the U.S. economy, Dudley noted in Rochester, N.Y., in early August. The Chinese economy is "basically the same size as the U.S. economy now, although per-capita GDP is still much higher in the United States," he said. China's per-capita GDP is $7,593, according to the World Bank, compared with $54,629 in the U.S.
Source: Reuters
