By Alan Beattie 2008-10-22
The news of China's slowing economy might have been unwelcome in Beijing but, if anything, it will have gone down even less well in the rest of the world. The optimistic projections of some economists this year that the developing world, and particularly China, could “decouple” from a recession in the rich economies now look rather forlorn.
Perhaps the most disturbing element is not merely that China's economy appears so vulnerable to a slackening in demand for exports, but that such growth started weakening even before a particularly severe global slowdown was in train.
Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, says that the rough arithmetic of China adding a percentage point to global economic expansion each year – growth of 10 per cent in an economy that makes up about a tenth of world gross domestic product – will no longer hold. “China's contribution to global growth is declining rapidly,” he says.
China's net exports have contributed 2.3 percentage points or 2.4 percentage points of growth to the Chinese economy over the past few years. “That has halved even in advance of a major global slowdown in the first three quarters [of 2008], and is likely to drop further,” Mr Lardy says. Chinese net trade – exports minus imports – improved in the most recent months but that mainly reflects a fall in the price of imported oil and, adjusted for prices, its contribution to China's growth has been falling.
Despite optimistic talk that it is moving up the value chain, much of China's external sector remains dependent on an assembly model of exporting goods made from importing subcomponents, often from other Asian emerging market countries. So a softening in export demand for Chinese goods will have knock-on effects.
“It was always too optimistic to assume that Asia could manage to hold up global growth by itself, but it could at least have had a role softening a worldwide slowdown,” says Nigel Gault at the economic consultancy Global Insight. “The real concern is that if China is slowing independently, it might mean that the whole of emerging Asia is weakening as well.”
Economists also say that, compared with previous episodes of global economic weakness, China's economy and the authorities in Beijing are limited in their ability to respond. The last big worldwide economic slowdown came in 2001 in the aftermath of the bursting of the technology bubble in global stock markets.
But at that time, China's surging export growth had largely been equalled by rapidly rising imports, and so its overall trade and current account surpluses were rather small, meaning that overall growth was less vulnerable to a fall in demand for exports. It also had more potential to ramp up investment spending in response. “China is much more vulnerable to changes to global demand this time round,” Mr Lardy says.
One way in which Beijing is likely to react might well rile its trading partners. Yi Gang, deputy governor of the People's Bank of China, told bankers at the International Monetary Fund meetings in Washington last week that Beijing was likely to slow the appreciation of the renminbi if the economy got less of a boost from the current account surplus.
That will go down badly in Washington. The howls of complaint that echoed around Capitol Hill some years ago that China was stealing US jobs have diminished somewhat as Beijing has allowed its exchange rate to rise. Those complaints are only likely to increase again in volume if China resumes intervening on as large a scale as before to prevent the currency appreciating further. And they might reach a deafening pitch if, as seems very likely, it happens at a time of rising US unemployment.
The same is likely to be true in Europe, which has been concerned at the strength of the euro. Although the renminbi has been largely constant against the dollar over the past few months, it has continued to appreciate against the European currency, a rise that might well have contributed significantly to China's waning export growth. If Beijing resumes holding down the renminbi against all its big trading partners, the currency wars could well start again.
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