[SCMP Column] Why Blame China for the Funk over Global Economic Malaise?

August 27, 2015

Gosh, isn’t everyone in a funk about the state of the global economy – and China in particular.

If even the august and sober Financial Times trumpets: “Global stocks suffer sell off as fears intensify over Chinese slowdown”, you know the funk is official. For at least two months now, the fever has raged. Combine the initial sharp Chinese equity market correction in Shanghai, with long-flagged efforts to rebalance the economy to rely less heavily on exports, with flaccid economic data, and now a currency devaluation, and the world’s economic and stock market “commenterati” are wailing in unison: the global economy is in crisis, and China is to blame.

I am not expert enough to opine on whether or not there are good grounds to panic, but a lot of the fuss seems to sit on fragile foundations from my worm’s eye point of view: China’s economy clearly needs the restructuring that is currently under way towards more domestic consumption, and less export dependency; the Chinese equity markets have been preposterously over valued for a very long time, and so a big correction is needed, and long overdue; and the currency too is generally regarded as too strong. So a lot of what we are panicking about seems to be predictable and necessary adjustment.

But the fuss does underscore how heavily economic confidence worldwide has, since the 2008 global financial crisis, relied on locomotive pull from China. There is of course irony in this, in that for the previous two decades to two acknowledged locomotives of economic growth were the United States and Europe. It is intruiging how, as these two locomotives spluttered and stalled through 2008 and 2009 (and Europe seems hopelessly stalled still, seven years later), everyone so quickly assumed that this emerging and often despised Chinese economy would take up the slack.
I confess that I at that time was among those who really didn’t realise how heavily we had all come to depend on the Chinese economy. I was surprised when I discovered the numbers on China’s contribution to global GDP growth.
And I have been surprised again as I have revisited those numbers through to 2015. Something funny is going on that makes the “funk” a little bit puzzling.

In 2007 – the year of strongest global growth ahead of the 2008 crash – the US, with an economy of UD$14.48tr, and 1.78% growth, added UD$260bn to the global GDP (according to the IMF). Meanwhile, the EU, growing at 3.34%, on a GDP of US$17.67tr, added about UD$511bn. And China, with a smaller US$3.5tr economy but 14.2% growth added US$1.33tr to the global economy. Amazing how helpful to the world economy China’s heady GDP growth was. So the three together added US$2.1tr in value to global economic output.

Turn to 2014, seven years into the global recession, and the numbers tell a fascinating story: the US, with a GDP of US$17.4tr, and growth up to 2.39%, added US$375bn to the global economy. But the EU, flatlining at 1.4% growth, added just US$200bn. China’s growth had tumbled to 7.4%, but with a GDP valued by then at US$10.4tr, it added US$1.32tr to the global economy – steady as she goes from 2007. Of course, together, the three only added US$1.9tr – a headache compared with global growth of US$2.1tr in2007.
If you take the global funk over China seriously, then the 2015 numbers should surely look horrid. But so far that seems not to be so. If you look at IMF projections for 2015, US growth has strengthened to 3.13% growth – adding US$504bn to the global economy – almost double its dollar contribution at the pre-crash peak in 2007. The EU, stirring to 1.85% growth is expected to add US$342bn. And faltering China, at a projected 6.7% growth, is predicted to add $1.3tr to the global economy. The three together are expected to add US$2.15tr to the global economy – a big recovery from 2014, and surpassing the 2007 pre-crash record.

How is it then that even though the global economy is growing this year faster in dollar terms than at any previous point in history, everyone is so in a funk?

The first and obvious possible answer is that none of us believe China’s GDP numbers. But if we don’t believe them in 2015, why should we have believed them in 2007? Another possible answer is that GDEP is an eccentric and partial measure of the state of the world economy. This too could be true, but again, why should it have been any more indicative in 2007?

A third – and possibly more substantial answer is that China is in the process of “onshoring” many of the global production chains it sits at the heart of. As it reduces reliance on simple assembly and export (which leaves other economies with the lion’s share of economic benefit from its growth), and brings more value-added parts of the production chain into China, and focuses more on domestic consumer demand, more of China’s $1.3tr contribution to global economic growth stays inside China rather than leaking out.
At this point, I really have no confident answer. All I know is that the present funk seems to sit on not-very-credible foundations. Something big and strange is going on, but we seem not quite to know what it is.

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