Thursday, May 28, 2009

Can China lead the global recovery ?

There was much talk as of late on the potential for China to lead the global growth recovery that is forecast 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 the Chinese growth can really lift, per se, 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.

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 are directly or indirectly exposed to Chinese growth through its effects on commodity prices. Indeed, the price of oil for example is heavily dependent on marginal changes of demand coming from China, but for this relationship to hold strongly it is also important that oil demand recovers in the major developed economies. This is exactly the kind of circular causality effects that make it difficult to forecast any impact of Chinese growth on world 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 cheer size of the stimulus package that the government has enacted is a much needed substitute for growth at times when the exports engine is havoc. China is like a plane that now runs on one reactor, putting much effort on investment in infrastructure and domestic demand. It is better than having no reactor at all, but this public-funded engine cannot support the economy for ever. Exports are still much needed for China, although in the long run the transition to a consumption-led, knowledge-based service economy is the real challenge.

I leave you with some chinese economists' views on China from this interesting panel brought together by McKinsey Quarterly.