Can China Really Lead the Global Recovery?

Includes: CAF, FXI, GXC, PGJ
by: Alexandre Kateb

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 (NYSEARCA:FXI).

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