Can China Really Lead the Global Recovery?

There was much talk recently on the potential for China to lead the global growth recovery that is expected by many economists by the end of this year.

Although China has certainly much more weight in the global economy now than it used to have in the past, it would be rather naive to think that China, per se, can really lift the global economy. The reason for that is simple. In nominal GDP terms, the developed economies still account for nearly three quarters of the global economy, and the current crisis is the worst synchronized recession that the developed economies have witnessed since the 1930s.

At the present time, China is more dependent on the rest of the world than the world is dependent on China. Although commodity exporting countries such as Brazil or Russia are directly or indirectly exposed to Chinese growth through its effects on commodity prices, they are also facing important financing constraints at the moment, especially for the latter. In addition, it is true that the price of oil for example is heavily dependent on marginal changes of demand coming from China, but for this non-linear relationship to hold strongly it is important that oil demand recovers in the major developed economies, as well. This is exactly the kind of circular causality that make it difficult to forecast any direct impact of Chinese growth on commodity prices, let alone on global growth.

What China can do, and effectively does, is to weather down the impact of the global recession on its economy, by actively mobilizing its huge fiscal and monetary reserves. The sheer size of the stimulus package that the government has enacted so far is a much needed substitute for growth in times where the export engine is havoc. China now looks like a plane that runs on one reactor, putting much effort on investment in infrastructure and measures to support domestic demand. It is better than having no reactor at all, however, this government-fueled engine cannot support the economy for ever. Exports are still much needed in the short term for China, even though in the long run the transition to a consumption-led, knowledge-based service economy is the real issue.

Disclosure: Long position on FTSE/XINHUA China 25 ETF (FXI).

Comments

[Drew Arnold:]

While China does have a relatively small nominal GDP compared to an aggregate measure of the "developed economies", the idea that China might lead the rest of the world out of recession is behind the amount demand that China is providing. China is providing a level of demand that is not currently seen in the developed economies, but it could spark demand in those economies since many of them will be providing for China's demand. Picture China as a match lighting a fuse as opposed to a small economy struggling to drag the rest of the world's economies behind it. Within this analogy, China's relatively small nominal GDP when compared to the developed markets as a whole is a lot less significant.

May 28 03:05 PM

[Larry House:]

Not to parse words, but a great deal depends on the meaning of "recovery." I do not think China can lead the world to the economic level of activity of three years ago, but China can help the world to muddle along and avoid a deep pit. China has much to gain from the current plight of the U.S., and it is not all economic.

May 28 04:51 PM

[Alex Filonov:]

Chinese economy is export oriented right now. Unless China does an extremely unlikely trick and change economy to internally driven, any talk of it leading world recovery is absurd. Where is it going to sell the stuff?

May 28 06:00 PM

[HaavBline:]

There is not much need to debate this subject anymore. The concensus is already in.

Still, a good, precise and concise analysis.

May 29 02:29 AM

[johnbee:]

China can grow within itself and Asia. It has 5x the growth prospects that the West has and no old population and union welfare and pension costs to pull it down.

May 29 08:20 AM

[Alphameister:]

Just because China will be in the forefront of any worldwide economic recovery doesn't mean it will be "leading" the recovery in the sense that a healthy and rebounding US would be able to lead a recovery. It will have a leadership role in the recoveries of resource-rich countries who are supplying the raw materials needed by China.

May 29 09:31 AM

[coreopsis:]

I think the premise of the article -- based on 'nominal' GDP as the driver of the world economy -- is fallacious. By that measure, only the larger 'nominal' GDP economies (US, Japan) could or would be engines. GDP is notoriously imprecise and calculated differently across the globe (it's not a scientific term, it's an economic scalar).

Far better is demand for goods and services (including fiscal ability to pay for such) at the MARGIN (ie, the old 'marginal demand' of Econ 101). Look at iron ore -- two relatively healthy economies (Australia, Brazil) have significance dependence on Chinese demand -- and thus marginal demand (and marginal price) are critical to economic growth on both sides.

This article is a perfect example of why college students are normally offered a pair of Econ courses (101 Macro, 102 Micro). If you can't understand demand at the enterprise level, there will be distortions looking at global economics.

May 29 09:41 AM

[Albert Meyer:]

Alex, tell us what is the export component of China's GDP? How does that number support your assertion. Thanks.


On May 28 06:00 PM Alex Filonov wrote:

> Chinese economy is export oriented right now. Unless China does an
> extremely unlikely trick and change economy to internally driven,
> any talk of it leading world recovery is absurd. Where is it going
> to sell the stuff?

May 29 10:05 AM

[huangthomas:]

Export account for 30% of Chinese GDP and 20% of GDP growth.

May 29 02:11 PM

[punk_ash:]

Does anyone here really care who gets the market going again. I think not. Most are here to ensure that their investments ride the next boom cycle. Look at the valuation of Chinese or just about any other emerging market stocks and it is already at the January 2007 levels. We all know that we were in a bubble at those levels. FXI has doubled since March.

Anyone looking at this planet from an outside world would call Earth as one big speculative market. This is crazy and not to be expected when the whole idea of equity was hunderds of years ago.

May 30 01:16 AM