As the saying goes, “When China sneezes, the rest of the world catches a ... ”— wait a minute, isn’t that old chestnut supposed to be about the US?
Maybe, but these days a slowdown or recession in China could be almost as important for global growth as one in the US. Will Beijing be able to engineer a soft landing for its racing economy, or will the world be hit with a triple-whammy of weakness in the US, Europe and China?
Growing big: Pedestrians walk past a Buick showroom in Shanghai. China’s government realizes that its economy is in danger of overheating, but it has been reluctant to take severe measures to put the brakes.
The globalization of China’s economy has not just seen Chinese products enter billions of homes around the world, it has also linked the world’s fortunes to China’s economic future. China’s exports, clocked at about $1.2 trillion (around Rs51.96 trillion) last year, make up almost 9% of the world’s total. But its imports, at $900 billion, are also helping to keep other economies afloat.
About a third of that total comes from nearby Japan, South Korea and Taiwan. With Japan trying to cement its long-awaited recovery and South Korea worried about slowing demand for its exports, a dip in China’s growth could be dangerous. The US and Germany, China’s other major suppliers, will also be looking on with concern.
If the dip comes, how big will it be? China’s government clearly realizes that its economy is in danger of overheating, but it has been reluctant to take severe measures to put the brakes on growth. A moderate but steady increase in the value of the yuan may help to erode China’s trade surpluses. Interest rates, however, have yet to rise substantially.
Part of the reason for this expediency is probably political. China’s central bank isn’t really independent of the political leadership, so even the double-digit inflation predicted by some economists might not lead to tighter credit, especially during the showcase of the Olympics this summer. And if the bank was already reticent, recent events may have exacerbated the situation.
“We think official concern for growth will keep the authorities from taking aggressive actions to slow inflation,” wrote Tim Condon, chief economist for Asia at ING Barings, in his June forecast. “Raising interest rates would be seen as almost unpatriotic in light of the massive reconstruction needs from the earthquake.”
For the past couple of years, China has been seeking to dial down its economic growth from 11 or 12% annually to a figure more like 8 or 9%. Even that change has been difficult to achieve.
If inflation keeps increasing and growth doesn’t ease soon, a soft landing — a slight slowdown in economic activity without slipping into a recession — could be impossible.
So far, inflation in China has been partially driven by domestic demand and partially by increases in global commodity prices. Yet pressure on wages could drive domestic prices even higher in the second half of this year, said Dong Tao, chief economist for Non-Japan Asia at Credit Suisse.
“If we’re seeing wage increases, we’re seeing price adjustments,” he said. “If these factors lead to the second wave of inflation, then we might have a much bigger problem. Then the government might launch a much more aggressive credit policy than what we’ve seen now.”
Tao said he saw two scenarios for the Chinese economy. In one, lower demand for China’s exports would cause a slight slowdown in the country, taking some pressure off prices and allowing the economy to catch its breath. China’s growth rate would drop by a couple of percentage points, but it would be enough to stem inflation.
In the other scenario, high inflation would lead to aggressive action by the government in the form of higher interest rates and perhaps faster appreciation in the yuan as well. The booming Chinese property market would take a hit, like the already reeling stock market, and domestic consumption would suffer — as would demand for products from the rest of the world.
That would be an important development for the global economy. A drop in China’s annual growth rate from 12% to, say, 4% would cost the global economy about $280 billion in lost output — almost exactly the same as a drop from 3% growth to 1% in the US. Even though the US economy is still four times the size of China’s, the rapid growth in China would still be sorely missed.
©2008/The New York Times