The recently published European Union (EU) GDP figures, following those for the US and Japan, complete the picture of slow growth in the developed economies. Given weak growth, and possible recession, in the developed economies an evidently important question for the global economy is how much this will affect China – now by all measures the world’s second largest economy?
Should the present economic situation be conceptualised as generalised ‘economic slowdown’
A number of commentators suggest that the present international economic situation should be conceptualised as a generalised phenomenon of slow growth. The headline of an article by the Financial Times economics editor Chris Giles succinctly expressed such a perspective, ‘Fears rise as global output stalls’. Having analysed the well-known negative growth trends in developed economies the article continued: ‘similar gloom was evident in all other leading economies. In China, although the July figure beat expectations, the PMI also slipped for the fourth month in a row to fall 0.2 percentage points to 50.7.’ Similarly, the normally highly balanced John Authers, in The Long View in the same paper, analyzed: ‘alarm at the slowing down of the world economy – which includes China, nucleus of all hopes, as well as Europe and the US.’
Such analyses imply that a slowdown will occur in China in some sense equivalent to that in the US and Europe – otherwise it is misleading to place phenomena in the same category.
Such an analysis is erroneous as it is in contradiction with any quantitative comparison. China’s GDP growth, which was 9.5 per cent in the 2nd quarter of 2011, cannot be meaningfully compared to the present extremely slow growth in the US and Europe. Nor, for reasons analysed below, will China’s growth slow to any level which would place it in the same category as the US and Europe. As the question of China’s dynamic is of considerable importance for trends in the world economy it is useful to summarise current factual data and analyse the impact of trends in the advanced economies on China.
Slow growth not double dip is the key issue for comparison
The majority of media discussion in the US and Europe focuses on whether these economies face a double-dip recession. Whether this occurs naturally has short term implications for China’s economy, particularly in the balance of negative pressures it has to contend with. Slow growth in advanced economies is already helping commodity prices fall – by 19 August the Dow Jones-UBS spot commodity index had declined by 8.5 per cent since its end of April peak. This aids China in its struggle against inflation, which in turn would allow a more expansionary policy to be pursued by its economic decision makers. However recession in developed economies would be negative for China’s exports and increase pressure within the US for a new round of quantitative easing, with negative international financial consequences.
However the most decisive trend is not whether developed economies face a ‘double dip’. The key fact, which is already confirmed by the recent data, is that even without a new recession growth in all major developed economies is very slow. As shown in Figure 1:
- By mid-2011 no region among the developed economies had recovered its peak level of GDP more than three years after the high point of the previous business cycle.
- US GDP is 0.4 per cent below its peak in the 4th quarter of 2007.
- EU GDP is 1.8 per cent below its peak in the 1st quarter of 2008.
- Japan’s GDP is 6.0 per cent below its peak in the 1st quarter of 2008 – this is of course affected by the earthquake and tsunami.
Overall this represents over three years net negative growth in the developed economies.
China’s economic performance
For comparison China’s economy has already grown by over 30 per cent in the last three years – Figure 2. If growth continues throughout 2011 at the same rate as in the year so far i.e. assuming there is no recession in the US and Europe, then between 2007 and 2011:
- China’s GDP will have expanded by 44.5 per cent.
- US GDP will have expanded by 0.8 per cent.
- EU GDP will have contracted by 0.4 per cent.
Naturally there will be some modification in the final outcome from the figures projected above, depending on developments in the second half of 2011. But the relative orders of magnitude are already clear.
Scale of economic issues in the US, Europe and China
These figures put into their appropriate context current issues in China’s economy. Naturally all economies continually face problems – China’s most serious current one is inflation, followed by the need to control the build-up of local government and other debt. But China’s current issues, in the context of 40% plus growth in four years, are clearly qualitatively smaller than those in the US and EU where growth in the same period will be essentially zero per cent.
This outcome factually settles the debate among economists outside China on whether China, or the US and Europe, would come most successfully through the financial crisis. Some non-Chinese economists accurately predicted that China would grow rapidly, that inevitably in such a context some problems would arise, that these would be overcome by economic fundamentals, and that China would have a ‘soft landing’ - Jim O’Neill, former chief economist of Goldman Sachs, who coined the term BRIC, is probably the best known of these.
But others predicted China’s economy would perform badly. The most extreme, such as US hedge fund manager Jim Chanos, advised short selling China in expectation of economic catastrophe. Others projected that the US would recover from the financial crisis more rapidly than China. For example US financial analyst Michael Pettis claimed that: 'the US would be the first major economy out of the crisis and China one of the last.' With China’s economy expanding by 40% while the US has not grown at all, even if China’s growth were to slow it is already clear it has come through the financial crisis much more successfully than the US.
China and developing economies
A clear implication for China’s economy of the slow growth in developed economies is that it will have rely even more on a combination of expansion of its domestic demand and growth in developing economies.
The latter, however, have not slowed during the financial crisis in the same way as developed economies. In 2010, measured in dollar terms and not only percentages, seven out of ten of the world’s most rapidly growing economies were developing ones – China, Brazil, India, Russia, South Korea, Indonesia and Mexico. (Figure 3) Current dollar prices are used in this chart for all economies as this best indicates the growth of markets for China’s exports – which are analysed below.
Particularly striking is growth in economies classified by the World Bank as ‘middle income’ – all of which are developing, such as Brazil, India, Mexico etc. In 2010 GDP growth in the developed economies was $1.6 trillion, whereas in middle income ones it was $3.3 trillion – twice as much. (Figure 4)
Nor is this a short term trend. If a five year period is taken, starting before the financial crisis, average annual growth in developed economies was $1.4 trillion while in middle income economies it was $2.0 trillion. (Figure 5)
The world economy has therefore moved into a period in which, not only in percentage but in absolute dollar terms, growth in developing economies, particularly middle income ones, is either essentially equivalent to or is greater than in developed ones.
This trend gives China considerable advantages. China’s companies face tough competition in advanced markets where, in terms of brands, they are up against firms such as Apple. But in developing economies China’s companies such as Haier and Huawei are already building up strong brand positions. Rapid expansion by such companies in developing economies, in turn, gives them rapidly increasing revenue to plough back into R&D which strengthens their challenge in the developed markets.
Some analysts have correctly noted this. In an excellent recent report ‘Heavy Duty, China’s next wave of exports’ (currently available as a free download, which those following China’s economy should take advantage of) the Economist Intelligence Unit accurately notes: ‘In 2012 it is likely that non-OECD will take over as the primary export market for China. If Turkey, Chile and Mexico are excluded from the OECD group, the transition will take place in the second half of 2011. However defined, developing countries – especially emerging markets such as India and Brazil – will be the dominant driving force between China’s export growth in the coming decade.’
The overall trend regarding China’s overall exports is shown in Figure 6. The rapid rise of China's exports to developing economies, to the point where they will overtake those to developed economies, is clear.
China uses the countryside of the world economy to surround the cities
A graphic, accurate, and very Chinese way to conceptualise the above trends was succinctly expressed by an exam student at Antai College of Economics and Management in Shanghai - where I lecture. Having had the statistical trends in world trade outlined in an economist's usual prosaic fashion, i.e. more rapid growth in the developing economies and in China’s trade with them, the student remarked that this was a well known strategy: ‘the countryside will surround the cities’.
For those not familiar with China’s history the significance of this phrase is that leading to the creation of the People’s Republic of China, in 1949, Mao Zedong famously remarked that the correct strategy was that ‘the countryside will surround the cities’.
While the vocabulory of economic statistics is more mundane than the student’s graphic characterisation, nevertheless in essence their statement was both vivid and correct. Slow growth in the advanced economies, combined with rapid growth in developing ones, is creating a situation where China’s companies are building up very strong positions in the ‘countryside’ of the world economy from which to launch a challenge in its ‘cities’.
The growth trends in developing economies, underpinning their rapidly expanding position in China’s exports, combines with rapid expansion of its domestic demand to show why China’s economy will not significantly decelerate under the impact of slowdown in the US and Europe.
The overall international economic situation should therefore not be conceptualised as one of ‘generalised economic slowdown’. It should be conceptualised as one of significant slowdown in the US and Europe combined with continued rapid growth in China.
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A shortened edited version of this article appeared in China Daily.