With­out China, the world will be in re­ces­sion

... a post-cri­sis world econ­omy with­out Chi­nese growth would be in grave dif­fi­culty.

China Daily (USA) - - VIEWS -

Is the Chi­nese econ­omy about to im­plode? With its debt over­hangs and prop­erty bub­bles, its non-per­form­ing State-owned en­ter­prises and strug­gling banks, China is in­creas­ingly por­trayed as the next dis­as­ter in a cri­sis-prone world.

Such fears are overblown, for China has the strat­egy, where­withal and com­mit­ment to achieve a dra­matic struc­tural trans­for­ma­tion into a ser­vices-led con­sumer so­ci­ety.

But what if the China doubters are right? What if China’s econ­omy does in­deed come crashing down, with its growth rate plung­ing into low sin­gle dig­its, or even neg­a­tive ter­ri­tory, as would be the case in most cri­sis economies? China would suf­fer, of course, but so would the shaky global econ­omy. It’s worth con­sid­er­ing this thought ex­per­i­ment.

For starters, with­out China, the world econ­omy would al­ready be in re­ces­sion. China’s growth rate this year ap­pears set to hit 6.7 per­cent— con­sid­er­ably higher than most fore­cast­ers have been ex­pect­ing. Ac­cord­ing to the In­ter­na­tion­alMone­tary Fund— the of­fi­cial ar­biter of global eco­nomic met­rics— the Chi­nese econ­omy ac­counts for 17.3 per­cent of world GDP (mea­sured on a pur­chas­ing­power-par­ity ba­sis). A 6.7 per­cent in­crease in China’s real GDP thus trans­lates into about 1.2 percentage points of world growth. Ab­sent China, that con­tri­bu­tion would need to be sub­tracted from the IMF’s down­wardly re­vised 3.1 per­cent es­ti­mate for world GDP growth in 2016, drag­ging it down to 1.9 per­cent— well be­low the 2.5 per­cent thresh­old com­monly as­so­ci­ated with global re­ces­sions.

Apart from the di­rect ef­fect of a world with­out China, there are also cross-bor­der link­ages with other ma­jor economies.

The so-called re­source economies— Aus­tralia, NewZealand, Canada, Rus­sia and Brazil— would be hit es­pe­cially hard. As a re­source-in­ten­sive growth jug­ger­naut, China has trans­formed these economies, which col­lec­tively ac­count for nearly 9 per­cent of world GDP. Con­trary to the pop­u­lar be­lief that they have di­ver­si­fied eco­nomic struc­tures that are not overly de­pen­dent on Chi­nese com­mod­ity de­mand, cur­rency mar­kets say oth­er­wise: when­ever China’s growth ex­pec­ta­tions are re­vised— up­ward or down­ward— their ex­change rates move in tan­dem. The IMF projects these five economies will con­tract by a com­bined 0.7 per­cent in 2016, re­flect­ing on­go­ing re­ces­sions in Rus­sia and Brazil and mod­est growth in the other three. Need­less to say, in a China im­plo­sion sce­nario, this base­line es­ti­mate would be re­vised down­ward sig­nif­i­cantly.

The same would be the case for China’s Asian trad­ing part­ners— most of which re­main ex­port-de­pen­dent economies, with the Chi­nese mar­ket their largest source of ex­ter­nal de­mand. These economies in­clude In­done­sia, the Philip­pines, Thai­land, as well as the more de­vel­oped economies of Ja­pan, the Repub­lic of Korea and Tai­wan. Col­lec­tively, the six economies make up an­other 11 per­cent of world GDP. A China im­plo­sion could eas­ily knock at least 1 percentage point off their com­bined growth rate.

TheUS is also a case in point. China is theUS’ third-largest and most rapidly grow­ing ex­port mar­ket. In a China-im­plo­sion sce­nario, that ex­port de­mand would all but dry up— knock­ing about 0.2-0.3 percentage points off an al­ready sub­parUS eco­nomic growth of about 1.6 per­cent in 2016.

Fi­nally, there is Europe. Growth in Ger­many, long the en­gine of an oth­er­wise scle­rotic Con­ti­nen­tal econ­omy, re­mains heav­ily de­pen­dent on ex­ports. That is due in­creas­ingly to the im­por­tance of China— now Ger­many’s third-largest ex­port mar­ket. In a China im­plo­sion sce­nario, Ger­man eco­nomic growth could also be sig­nif­i­cantly lower, drag­ging down the rest of a Ger­man-led Europe.

In­ter­est­ingly, in its just-re­leased Oc­to­ber up­date of theWorld Eco­nomic Out­look, the IMF de­votes an en­tire chap­ter to what it calls a China spillover anal­y­sis— a model-based as­sess­ment of the global im­pacts of a China slow­down. Con­sis­tent with the ar­gu­ments above, the IMF fo­cuses on link­ages to com­mod­ity ex­porters, Asian ex­porters, and what it calls “sys­temic ad­vanced economies” (Ger­many, Ja­pan and theUS) that would be most ex­posed to a Chi­nese down­turn. By the IMF’s reck­on­ing, the im­pact on Asia would be the largest, fol­lowed closely by the re­source economies.

The IMF re­search sug­gests China’s global spillovers would add about an­other 25 per­cent to the di­rect ef­fects of China’s growth short­fall. It means that if China’s eco­nomic growth van­ished into thin air, in ac­cor­dance with our thought ex­per­i­ment, the sum of the di­rect ef­fects (1.2 percentage points of global growth) and in­di­rect spillovers (roughly an­other 0.3 percentage points) would es­sen­tially halve the cur­rent base­line es­ti­mate of 2016 global growth, from 3.1 per­cent to 1.6 per­cent.

While I amhardly up­beat about prospects for the global econ­omy, I think the world faces far big­ger prob­lems than a ma­jor melt­down in China. Yet I would be the first to con­cede that a post-cri­sis world econ­omy with­out Chi­nese growth would be in grave dif­fi­culty. China bears need to be care­ful what they wish for. The au­thor, a fac­ulty mem­ber at Yale Univer­sity and a for­mer chair­man ofMor­gan Stan­ley Asia, is the au­thor of Un­bal­anced: The Code­pen­dency of Amer­ica and China. Project Syn­di­cate

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