World eco­nomic growth— still made in China

China Daily (USA) - - ACROSS AMERICAS -

De­spite all the hand-wring­ing over China’s slower eco­nomic growth, 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 per­cent in 2016— in line with the gov­ern­ment’s of­fi­cial tar­get and only slightly above the In­ter­na­tional Mon­e­tary Fund’s lat­est pre­dic­tion of 6.6 per­cent – China would ac­count for 1.2 per­cent­age points of world GDP growth. With the IMF cur­rently ex­pect­ing only 3.1 per­cent global growth this year, China would con­trib­ute nearly 39 per­cent 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 per­cent in 2016— enough to con­trib­ute just 0.3 per­cent­age points to over­all world GDP growth, or only about one-fourth of the con­tri­bu­tion made by China.

The Euro­pean econ­omy is ex­pected to add a mere 0.2 per­cent­age points to world growth, and Ja­pan not even 0.1 per­cent­age points. China’s con­tri­bu­tion to global growth is, in fact, 50 per­cent larger than the com­bined con­tri­bu­tion of 0.8 per­cent­age points likely to be made by all of the 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 per­cent this year, or 0.8 per­cent­age points faster than China. But the Chi­nese econ­omy accounts for fully 18 per­cent of world out­put (mea­sured on the ba­sis of pur­chas­ing power par­ity) — more than dou­ble In­dia’s 7.6 per­cent share. That means In­dia’s con­tri­bu­tion to global GDP growth is likely to be just 0.6 per­cent­age points this year — only half the boost of 1.2 per­cent­age points ex­pected from China.

More broadly, China is ex­pected to ac­count for fully 73 per­cent of the to­tal growth of the BRICS group­ing of large de­vel­op­ing economies. The gains in In­dia of 7.4 per­cent and South Africa 0.1

per­cent are off­set by on­go­ing re­ces­sions in Rus­sia, mi­nus 1.2 per­cent and Brazil, mi­nus 3.3 per­cent. Ex­clud­ing China, BRICS GDP growth is ex­pected to be 3.2 per­cent in 2016.

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 per­cent av­er­age an­nual growth recorded dur­ing the 1980-2011 pe­riod. But even af­ter tran­si­tion­ing to the slower growth of 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 per­cent. Ex­clud­ing China, world GDP growth would be about 1.9 per­cent in 2016 — be­low the 2.5 per­cent thresh­old com­monly associated with global re­ces­sions.

The sec­ond im­pli­ca­tion, re­lated to the first, is that the widely feared eco­nomic “hard land­ing” for China would have a dev­as­tat­ing global im­pact. Ev­ery de­cline in Chi­nese GDP growth of one per­cent­age point 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 per­cent 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 full­blown re­ces­sion.

Fi­nally (and more likely inmy 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 in the global eco­nomic out­look. While the lat­est monthly in­di­ca­tors show China’s econ­omy sta­bi­liz­ing at around the 6.7 per­cent growth rate recorded in the first half of 2016, 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 the 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. The au­thor is a fac­ulty mem­ber at Yale Univer­sity and a for­mer chair­man of Mor­gan Stan­ley Asia, and au­thor of Un­bal­anced: The Code­pen­dency of Amer­ica and China. Project Syn­di­cate


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