21 September 2019
Economic confidence worldwide has increasingly relied on locomotive pull from China since the 2008 financial crisis. Photo: Bloomberg
Economic confidence worldwide has increasingly relied on locomotive pull from China since the 2008 financial crisis. Photo: Bloomberg

Is it right to blame China for the global growth funk?

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 the two acknowledged locomotives of economic growth were the United States and Europe. It is intriguing 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 US$14.48 trillion, and 1.78 percent growth, added US$260 billion to the global GDP (according to the IMF). Meanwhile, the EU, growing at 3.34 percent, on a GDP of US$17.67 trillion, added about US$511 billion. And China, with a smaller US$3.5 trillion economy but 14.2 percent growth added US$1.33 trillion to the global economy. Amazing how helpful to the world economy China’s heady GDP growth was. So the three together added US$2.1 trillion 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$17.4 trillion, and growth up to 2.39 percent, added US$375 billion to the global economy. But the EU, flatlining at 1.4 percent growth, added just US$200 billion. China’s growth had tumbled to 7.4 percent, but with a GDP valued by then at US$10.4 trillion, it added US$1.32 trillion to the global economy – steady as she goes from 2007. Of course, together, the three only added US$1.9 trillion – a headache compared with global growth of US$2.1 trillion in 2007.

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 percent growth – adding US$504 billion to the global economy – almost double its dollar contribution at the pre-crash peak in 2007. The EU, stirring to 1.85 percent growth is expected to add US$342 billion. And faltering China, at a projected 6.7 percent growth, is predicted to add $1.3 trillion to the global economy. The three together are expected to add US$2.15 trillion 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?

A 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 $1.3 trillion 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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Executive director of the Hong Kong APEC Trade Policy Group