China's tanking economy will hurt the US more than some experts think, top economist David Rosenberg says

Total foreign direct investment in China plunged to $5 billion in the second quarter from $101 billion in the first quarter of 2022.

• China's flailing economy could impact the US more than some experts think.
• That's because the US is a top foreign investor in China, economist David Rosenberg said.
• China also buys 40% of all exports from Chile, 34% of all exports from Australia, and 32% of all exports from Peru.

China's tanking economy will have a bigger impact on the US than some experts think, according to top economist David Rosenberg.

In an op-ed for the Financial Post on Tuesday, the Rosenberg Research founder and Atakan Bakiskan, a junior economist at Rosenberg's firm, pointed to the potential spillover effects stemming from China's economy, which has floundered since dialing back its zero-COVID policies. 

"The Chinese economy has headed into a severe slowdown, with its economy entering deflationary terrain and the property sector remaining in crisis mode. The economic downfall will weigh negatively on the global economy, primarily through trade channels on countries with a high dependency on China," Rosenberg and Bakiskan said.

The commodities trade in particular will feel the effects of China's economic problems, and countries that are top exporters of key metals are exposed, Rosenberg and Bakiskan said.

China is one of the largest importers of copper and iron in the world. The nation purchases 40% of all exports from Chile, 34% of all exports from Australia, and 32% of all exports from Peru, putting those nations at highest risk of spillover effects.

Meanwhile, total foreign direct investment in China plunged to $5 billion in the second quarter from $101 billion in the first quarter of 2022, representing a 95% plunge.

"So, when some pundits say 'don't worry about the United States, it doesn't export much to China,' what is missing from that statement is that the US is in the top five when it comes to foreign direct investment exposure in China," the economists wrote.

"And the companies that operate there with a view towards serving the Chinese economy (and the rest of Asia) are surely going to see a dampening effect on their worldwide profits and from that indirect effect, end up having negative repercussions for the stock market (or at least those companies with footholds in China who will be affected)."

Experts have warned that Beijing could even risk an economic crisis as it continues to grapple with a litany of problems, including high debt loads, poor demand, a failing property sector, and deflation. But the economic outlook could perk up so long as China keeps monetary policy appropriately loose, Morgan Stanley strategists said.