(Michael Nagle/Bloomberg/Getty Images)
The US economy is growing faster than Wall Street expected, markets are soaring and inflation is approaching the Federal Reserve's 2% target. It appears that a soft landing, where price rises are tamed and the economy manages to avoid recession, is possible.
Meanwhile, China's economy appears to be in distress. Markets are mired in a protracted slump, consumer confidence is weakening, growth is easing and the population is shrinking. A court has just ordered the winding up of Evergrande, with unpredictable consequences for China's real estate crisis.
So what does that mean for relations between the first- and second-largest economies in the world?
Before the Bell spoke with Eswar Prasad, a professor of trade policy at Cornell University and former head of the International Monetary Fund's China division.
The interview was conducted over email. It has been edited for clarity.
Before the Bell: Is it fair to say that the US is outpacing China in the race for economic supremacy?
Eswar Prasad: The US has solidified its position as the main driver of global growth, which is all the more striking as the rest of the world is struggling to maintain decent growth.
Just last year people might have said the opposite — that the US was heading towards recession and the Chinese economy was thriving. What changed?
It is remarkable to see the US economy blazing ahead while the Chinese economy sputters and slips into deflation. This difference is mainly due to the innate resilience of the US economy while China continues to be held back by a number of short term and long term problems. These problems include a declining labor force, a property market that is unraveling, and a loss of household and business confidence in the government's policies.
The strong performance of the US economy and falling growth in China together make it less obvious that China's economy will someday overtake that of the US in terms of annual GDP, a proposition that was once considered a near certainty.
How does this factor into rising tensions between the US and China?
China's weak economy and uncertain growth prospects are no doubt making the Chinese government more eager to reduce trade tensions with the US, since those tensions are adding to already uncertain growth prospects and hurting business confidence.
Both the US and Chinese governments do seem eager to prevent any further escalation of trade hostilities, particularly since rhetoric against China is going to get more heated in the US as the election season draws near.
What else should investors be aware of when they read about the Chinese economy?
Reflecting its concerns about the weak economy and falling stock prices, the Chinese government has increased government spending, cut interest rates, and taken measures to prop up the property and stock markets.
These measures are having limited effect since they haven't by themselves done much to solve the fundamental problem of weak household and business confidence, which is holding back household consumption and private investment.
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