Earlier on Monday we looked at China’s pork-led inflation and declining imports, only the latest data that would seem to reinforce increasing concern among market observers about the potential impact of a Chinese slowdown on global growth.
The US economy has hit a proverbial “soft patch” of uncertain transitoriness (TM), Europe remains mired in sovereign debt problems, Japan is still recovering from its earthquake, and the next commodities price shock always seems just round the bend. So, to be understated about it, now would be a bad time for China to grind to a halt.
In our podcast interview with Michael Pettis, the Beijing-based finance scholar said that China was more likely to experience many years of slowing growth rates rather than an outright credit-driven implosion.
We find that persuasive, but the consequences of stagnating growth on the rest of the world – even absent a financial crisis or economic collapse — remain non-trivial, especially for China’s trading partners.
Nomura had a note out on Friday showing China’s current and estimated contribution to annual GDP growth (bigger than that of the entire developed world, but don’t be misled — this is annual growth, and China’s actual economic production remains well below that of the US).
A chart and graph from the note (click to expand):
And comment from Nomura:
But our biggest concern, given the recent rise in the already high investment-to-GDP ratio (Figure 2), would be a pullback in investment growth in China, due to policy tightening, loss of monetary control or investment fatigue. Given how much global growth China accounts for, the world would really feel that.
That’s true, though there’s another way to look at this. Recall that the investment component of Chinese GDP has been flawed for a long time, as it fails to account for what Pettis describes as misallocated capital, environmental degradation, and other distortions.
So a decline in investment would indeed be a hit to Chinese and global growth, but possibly not as much as the resulting numbers would suggest. That is, it’s likely that Chinese GDP growth has been inflated for some time, and so the decline in growth that results from stalling investment would probably also be exaggerated.
Ideally, we’d want to see a reduction in the extent to which investment (especially the state-driven kind) fuels the Chinese economy anyway, and a true shift towards more consumption, powered by higher incomes for households. But as Pettis explained to us, that requires several things to happen: an appreciating currency, higher interest rates, and for wages to rise faster than productivity.
And it would all take time. Because these trends do appear to be taking place, but very, very slowly. In the meantime, if Chinese investment does slow, we can indeed expect the world to feel the effects of this grinding process.
As for how slowing imports will affect trading partners of China, we’ll leave you with this handy chart titled “The Slowdown in China: Who’s Exposed” from Bloomberg Businessweek:
Related links:
China’s stagflation question – FT Alphaville
The slowdown in China: who’s exposed – Bloomberg Businessweek
Introducing Alphachat, the FT Alphaville podcast – FT Alphaville
