Is China saving the world?

The obese, financially unrestrained , shopping binging American, the ideal customers for any retailer, is gone. With the world’s greatest economy mired in the Great Recession after the 2008/09 Financial Crisis, export-driven economies around the world have been hit badly. This is yet another textbook example on how when American sneezes, the world catches a cold. The world have been pretty much dependent on American Consumers, who consumes 53 times as many products as that of the average Chinese (Green Living Tips).

Obama’s visit to China and dialogue with President Hu Jintao on the need to “rebalancing” the global economy underscores the global imbalance that is hitherto too reliant on the consumption of Americans (Surowiecki). Can China be the engine that “hyperspaces” the world out of this recession, “Beam us up Scotty” style?

My favourite economist thinks so.
These graphs are taken from Professor Danny Quah’s blog.
These graphs shows the growth of the GDP of the ESE economies prior to and after the 1997 Asian Currency Crisis. It includes the extrapolation of the graph were the 1997 Asian Crisis not to occur and impact on the ESE economies and an actual graph on the growth of the GDP of the aforementioned economies after taking in the impact of the Asian Currency Crisis.


Graph 1
Graph 1 shows the GDP growth of the ESE economies excluding that of Japan’s when the Asian Currency Crisis hit. As the graph shows, there is a small cumulated underperformance of GDP caused by the ACC.(Of 5.1% according to Professor Quah).

Graph 2

The impact of China’s GDP growth on the entire ESE economy is striking over here. Without China, notice how large the underperformance is. The accumulated underperformance is 21% (Quah).

So an implication is that China’s share of the GDP growth is 15.9%, by having graph 2 – graph 1.

In short, China has been silently playing the role of the propeller all along, contributing a lot to the GDP growth of ESE Asia and in a way, the world.

The question is, is China’s ability to consistently and incrementally increase its GDP output good for the world? What if we indulge in some counterfactual thinking to make an assessment?

It is true that China’s GDP growth in theory, should help increase the disposable income of the Chinese, thus increasing their consumption. More consumption means increased aggregate global demand, thus subsequently stimulating increasing aggregate global supply and directly , the global GDP output. The problem is, sometimes looking picture at the aggregate distracts us from peering at things that are fundamentally more important. The purchasing power of Chinese Consumers have increased, but it is still not enough than what it ought to be when its growth is based on the model of artificually reducing costs (not enforcing minimum wage, devaluing the Yuan by pegging it to the US Dollar at a lower rate than what it ought to be).

Counterfactual thinking leads me to think that if the Chinese workers are to be paid more, with higher disposable income, then global economic output could have been higher. Hence, I think there is a “Global Consumption Gap,” and consequently a global GDP gap that is caused by not only unemployment and underemployment, but also of China’s growth model.


Graph 3

Graph 3 is taken from John Ross’s blog, showing China’s monthly changes in trade surplus “calculated as a three monthly moving average in order to avoid any purely short term distortions” (Ross).

This shows that the trade surplus of China has been decreasing, precipitiously to during the economic downturn. However, do note that the trade surplus is due to a decrease in export (because global consumption decreased during the financial crisis) compared to its import.
Ross notes that :”Under the impact of the financial crisis both China’s exports and imports have declined. But its imports have declined far less than its exports.”

Finally he summed up this wonderful post of his by stating that:
“This trend in China’s exports and imports would be by itself insufficient to offset the depressive effect on world trade of the fall in demand from the US.”

Sure, China can save the world, but it could have played a greater role, if only China’s consumer have the money…and appetite.

Notes:
I have focused too much on the comparatively lower per capita income of China in the lack of China’s consumerism. This could be misleading because I have neglected some Chinese virtues like putting aside money to save, a Confucian value that shapes much of the character of the ethnically Chinese citizens. However, the Surowiecki post places much more weight upon other things, the economic system of China, the limited financing and so on. Ultimately though, Surowiecki and I both agree on the need for the Chinese workers to have higher disposable income, and a different approach towards growth.

Advertisements