Global growth: Still made in China

STEPHEN ROACH

AUGUST 31, 2016

Despite all the hand-wringing over the vaunted China slowdown, the Chinese economy remains the single largest contributor to world GDP growth. For a global economy limping along at stall speed — and most likely unable to withstand a significant shock without toppling into renewed recession — that contribution is all the more important.

A few numbers bear this out. If Chinese GDP growth reaches 6.7 per cent year — in line with the government’s official target and only slightly above the International Monetary Fund’s latest prediction (6.6 per cent) — China would account for 1.2 percentage points of world GDP growth.

With the IMF currently expecting only 3.1 per cent global growth this year, China would contribute nearly 39 per cent of the total.



That share dwarfs the contribution of other major economies.

For example, while the United States is widely praised for a solid recovery, its GDP is expected to grow by just 2.2 per cent this year — enough to contribute just 0.3 percentage points to overall world GDP growth, or only about one-fourth of the contribution made by China.

A sclerotic European economy is expected to add a mere 0.2 percentage points to world growth, and Japan not even 0.1 percentage point. China’s contribution to global growth is, in fact, 50 per cent larger than the combined 0.8-percentage-point contribution likely to be made by all of the so-called advanced economies.

Moreover, no developing economy comes close to China’s contribution to global growth. India’s GDP is expected to grow by 7.4 per cent this year, or 0.8 percentage points faster than China.

But the Chinese economy accounts for fully 18 per cent of world output (measured on a purchasing-power-parity basis) — more than double India’s 7.6 per cent share. That means India’s contribution to global GDP growth is likely to be just 0.6 percentage points this year — only half the 1.2-percentage-point boost expected from China.

More broadly, China is expected to account for fully 73 per cent of total growth of the so-called Brics grouping of large developing economies.

The gains in India (7.4 per cent) and South Africa (0.1 per cent) are offset by ongoing recessions in Russia (-1.2 per cent) and Brazil (-3.3 per cent). Excluding China, Brics’ GDP growth is expected to be an anaemic 3.2 per cent this year.

[So why is India's growth offset by Russia and Brazil's recession, and China's growth used to contribute to world GDP? Roach's argument that China's 6.7% growth contributes 1.2% global GDP and is 39% of Global 3.1% growth is a simplistic and flawed computation/argument.]

So, no matter how you slice it, China remains the world’s major growth engine. Yes, the Chinese economy has slowed significantly from the 10 per cent average annual growth recorded during the 1980 to 2011 period.

[China has 1.3 billion people and a per capita GDP of about $14.800. This puts China at 87th position. US is 11th at $58,600. (Singapore is 3rd at $88,845). Although China's per capita GDP is about 1/4 of the US, it's 1.3 billion people may be  more than 4 times that of the US. So it may well be the biggest economy by GDP by now. However, the latest data puts China still in 2nd place.] 

But even after transitioning from the “old normal” to what the Chinese leadership has dubbed the “new normal”, global economic growth remains heavily dependent on China.

There are three key implications of a persistent China-centric global growth dynamic.

First, and most obvious, continued deceleration of Chinese growth would have a much greater impact on an otherwise weak global economy than would be the case if the world were growing at something closer to its longer-term trend of 3.6 per cent.

Excluding China, world GDP growth would be about 1.9 per cent this year — well below the 2.5 per cent threshold commonly associated with global recessions.

[Doesn't this actually mean that the world IS in a recession, except for China? And maybe some countries whose economies are strongly linked to China?]

The second implication, related to the first, is that the widely feared economic “hard landing” for China would have a devastating global impact.

Every one-percentage-point decline in Chinese GDP growth knocks close to 0.2 percentage points directly off world GDP; including the spillover effects of foreign trade, the total global growth impact would be around 0.3 percentage points.

Defining a Chinese hard landing as a halving of the current 6.7 per cent growth rate, the combined direct and indirect effects of such an outcome would consequently knock about one percentage point off overall global growth. In such a scenario, there is no way the world could avoid another full-blown recession.

Finally (and more likely in my view), there are the global impacts of a successful rebalancing of the Chinese economy.

The world stands to benefit greatly if the components of China’s GDP continue to shift from manufacturing-led exports and investment, to services and household consumption.

Under those circumstances, Chinese domestic demand has the potential to become an increasingly important source of export-led growth for China’s major trading partners — provided, of course, that other countries are granted free and open access to rapidly expanding Chinese markets.

A successful Chinese rebalancing scenario has the potential to jump-start global demand with a new and important source of aggregate demand — a powerful antidote to an otherwise sluggish world. That possibility should not be ignored, as political pressures bear down on the global trade debate.

All in all, despite all the focus on the US, Europe or Japan, China continues to hold the trump card in today’s weakened global economy. While a Chinese hard landing would be disastrous, a successful rebalancing would be an unqualified boon. That could well make the prognosis for China the decisive factor for the global economic outlook.

While the latest monthly indicators show China’s economy stabilising at around the 6.7 per cent growth rate recorded in the first half of this year, there can be no mistaking the headwinds looming in the second half of the year.

In particular, the possibility of a further downshift in private-sector fixed-asset investment could exacerbate ongoing pressures associated with deleveraging, persistently weak external demand and a faltering property cycle.

But, unlike the major economies of the advanced world, where policy space is severely constrained, the Chinese authorities have ample scope for accommodative moves that could shore up economic activity.

And, unlike the major economies of the developed world, which constantly struggle with a trade-off between short-term cyclical pressures and longer-term structural reforms, China is perfectly capable of addressing both sets of challenges simultaneously.

To the extent that the Chinese leadership is able to maintain such a multi-dimensional policy and reform focus, a weak and still vulnerable global economy can only benefit. The world needs a successful China more than ever.


ABOUT THE AUTHOR:

Stephen Roach, a faculty member at Yale University and a former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

[Comment online:

Roach is well known as being bullish on China and optimistic about China's growth and in general, a cheerleader for China.
But I detect a guardedness in this latest missive of his.
He start with incontrovertible proof that China's place in the global economy is dominant and is the major growth engine. He spends almost half the article rah-rah-ing about how big China's economy is.

Then his first concession: " Yes, the Chinese economy has slowed significantly from the 10 per cent average..." 

Then he spends the next 5 paragraphs (or so) explaining why if China sneezes. the world will catch a cold - Because China is so big, and the global economy is weak. And, to repeat his earlier point, China contributes to 39% of global economic growth.
(I'm not sure about that conclusion, but I'm not an economist, and its not really relevant, so not going to argue over irrelevant minutiae.) 

Then he spends the last half (or slightly less) of the article to tell us Why it would benefit the world **IF** China succeeds in rebalancing her economy... "provided, of course, that other countries are granted free and open access to rapidly expanding Chinese markets." 

But he hedges his analysis too - A successful China only has "the potential to jump-start" the global economy, That is a "possibility".
Why only a possibility? Wasn't he previously more enthusiastic about China's growth?
Because, "there can be no mistaking the headwinds looming in the second half of the year." 

But then he recovers in the last three paras:
"the Chinese authorities have ample scope for accommodative moves that could shore up economic activity"
"China is perfectly capable of addressing both sets of challenges (short-term cyclical pressures and longer-term structural reforms) simultaneously."
" Chinese leadership is able to maintain such a multi-dimensional policy and reform focus," 

And what is his conclusion?
"The world needs a successful China more than ever." 

So I have to ask, "so what?"
Say I agree with the conclusion, that we need a successful China, so what?
I need free internet access with unlimited data. Will I get it?
I need a Good Class Bungalow. Will I get it?
I need to drive or own a Ferarri. Will I get it? 

So what is the point of this artcie? To get us to pray for the success of China?

The assumption that China will make the "rebalancing" needs to be questioned.

To summarise, China's growth so far has been export-driven. The US and the developed world wants shoes, T-shirts, iphones, ipads, etc. China makes them and sells them to the world. And their economy grows.

However, as the global economy slows, China is "pivoting" or rebalancing their economy so that domestic demand could drive their economy. 

Except that the Chinese are not consuming as much as the Americans, or other economies of the West. 

Culture? "Asian values"? Or something more indirect like social safety nets?

China is not like western developed economies. It may have adopted Capitalistic practices, but not its principles. It may want to be a consumer economy, but it does not have the social compact that enables a consumer society to emerge. China may still have a consumer society. A social safety net may not be the only way for one to emerge. Or the one that emerge may not be as spendthrift as one with a social safety net, but it may well be big enough for China to succeed.]