Can China’s growth save the world?

Monday April 27, 2009
Hock's View - By Choong Khuat Hock

IN answering the above question, one would have to look at the position of China in the world today.
Although China overtook Germany to become the world’s third largest economy in 2008 and is likely to overtake Japan possibly in 2010, it only accounted for 6.8% of the world economy in 2008.
Large economies like the United States, European Union and Japan, which in total account for 61.1% of the world economy, are in recession. China’s gross domestic product (GDP) slowed down to 6.1% in the first quarter of 2009 from 10.6% inthe first quarter of 2008. Even if China can grow at 8% this year, it would only contribute around 0.5 percentage points to world growth while a contraction of say 3% for the United States, Europe and Japan would subtract around 1.8 percentage points from world growth.
Another way to look at China’s potential impact is to look at its impact on world trade. If a country with a large population and GDP does not trade with the world, its growth or contraction will not impact the economy of other nations. Although, imports and exports are linked, the amount that a country imports impacts directly trade with the exporting nation. It can be seen that the collapse of US imports is the main reason for the plunge in Asian and Malaysian exports.
This results in a vicious cycle of global trade contraction as countries suffering from lower exports will in turn import less raw materials, semi-finished goods and machinery. Eventually, shrinking global trade will also negatively impact US exports.
China has been the largest marginal buyer of commodities like oil, iron and copper, and when it imports less commodities, commodity prices collapse. China is the world’s largest exporter and imports mainly raw materials and some higher end machinery and semi-finished goods.
Chinese imports from the rest of the world have grown over the years but its imports at US$866.2bil in 2008 are still significantly below that of the United States at US$2.1 trillion.
Hence even if the 4 billion renmimbi (RM2.1bil) fiscal stimulus boosts the Chinese economy and hence imports, higher Chinese imports are unlikely to offset a decline in US, German and Japanese imports, which in total amounted to US$3.9 trillion in 2008, which is 4.5 times greater than what China imported. Indeed, Chinese import growth has declined by 25% year-on-year in March 2009.
Based on the above argument, it would appear that China, with a low government debt to GDP of slightly over 20% and reserves of US$2 trillion, may be able to save itself but not the world.
Nevertheless, exports of essential foodstuff to China like vegetable oil should be relatively more resilient compared to raw materials like iron and copper which is more dependent on industrial activity.
Chinese fiscal stimulus alone is insufficient to save the world but will go some way towards stabilising commodity demand and prices. A lot still depends on US consumers who are unfortunately trying to save themselves from drowning in a sea of debt.
With US consumer debt (housing and consumer) at 92% of GDP and with rising unemployment and falling wealth (lower house and stock prices), US consumers will have to deleverage over a long period, perhaps over a decade if the Japanese post-1990 real estate bubble experience is to be taken as an example. That can only mean that imports from Asia are unlikely to recover quickly.

ทChoong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd. Readers’ feedback is welcome. Please email to starbiz@thestar.com.my
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