by Mark Thirlwell - 14 July 2009 9:38AM
One hope in the rest of emerging East Asia is that the Chinese economy – now forecast to grow at more than 7% this year – might be able to substitute for lacklustre rich world demand in the next few years. Proponents of this view note that, in recent years, the change in the value of Chinese imports has exceeded that of the US:
They also emphasise that emerging Asia’s trade exposure to China has grown, even as its exposure to the US has fallen:
Unfortunately, these comparisons exaggerate China’s ability to act as a substitute for the US, let alone other developed economy markets, since much of the region’s trade with China comprises intermediate products that are ultimately shipped to final markets in the rich world.
As this research paper from the Hong Kong Monetary Authority explains, once the effect of such indirect exports are taken into account, US consumers still accounted for more exports from East Asian economies than Chinese consumers, and there has been no dramatic increase in the share of exports consumed by China relative to the share consumed by the US, Japan and other developed economies.
This point is true for intra-regional trade more broadly, with the Asian Development Bank noting a couple of years back that more than 70% of intra-Asian trade comprised intermediate goods used in production, of which half was driven by final demand outside Asia.
Indeed, even as the reported share of direct regional exports going to the US has fallen, the increased importance of the trade in components means that the correlation between intra-regional Asian trade and US imports has actually increased in recent years.
In the near (and medium term), then, China will be unable to provide a complete substitute for weaker demand in the region’s traditional markets. That said, much of this analysis is backward looking, and China will become an increasingly important destination for regional exports, so this story will change over time – of which more in a future post.