China Can't Do It Alone

As rich countries, led by the Untied States, prepare themselves for a tepid recovery, can the BRICs, led by China, pick up the slack?

In a new paper for Vox, Deutsche Bank's Markus Jäger discusses China's prospects for becoming the de-facto engine for global growth. His concussion: China already is the decisive engine for global growth. 

By 2014, assuming things are back to normal, China and the US will account for around 30% and a little over 10% of global growth, respectively – and this assumes relatively optimistically US growth of more than 3% per annum. In this sense, China will be the global growth “engine”. But this is nothing new. China’s contribution to global growth amounted to 20% during the better part of this decade, almost twice size of the US contribution.

Yet, the spillover effects from this surge in growth are likely to disappoint, and certainly won't alleviate the pain felt by the slower OECD economic growth:

To what extent will Chinese growth drive demand and growth in the rest of the world? Recently, Chinese imports have been growing faster (or declining more slowly) than Chinese exports, resulting in a deterioration of the trade balance. A decline of China’s net exports by some $160 billion – China’s current account is forecast to fall from 10% of GDP to 5% of GDP in 2009 – would add the equivalent of 0.3% to demand in the rest of the world (DB Research 2009a).

Unless one assumes the presence of excessively optimistic multipliers, this won’t add much to either global demand or US (and EU) growth. Assuming China’s bilateral trade surpluses decline in equal measure, increasing Chinese net imports would add less than 0.1% of GDP to US final demand this year. This simply pales in comparison with the discretionary fiscal stimulus measures, excluding automatic stabilisers and monetary stimulus measures, implemented in the US (and other advanced economies).

Jäger's bittersweet assessment is shared by World Bank president Robert Zoellick. In his speech this morning, Zoellick expressed cautious sentiments about China's role in the post-crisis economy:

Today, China acts as a stabilizing force in the global economy... And yet... China's future is not yet determined. Its rapid recovery in 2009 was fueled by an expansion of credit of 26 percent of GDP in the first eight months of this year. This flood is now easing, and authorities are likely to limit it further for fear of effects on asset prices, asset quality, and eventually general inflation. China still faces big uncertainties in 2010.

China's leader's recognize these risks, including the continued dependence of China and other emerging economies on export-led growth. It will not be easy for China to shift to increasing reliance on domestic demand, especially to greater consumption that could help balance world growth while contributing to China's goal of a more "harmonious society".

China is too often seen as a one-stop shop for the crisis recovery. A replacement for the US consumer? Check. A source of low-cost borrowing to stimulate your OECD economy? Check. A source of investment funds for emerging, commodity-rich economies? Check.

Alas, if it sounds too good to be true, it probably is. The search for a more balanced, sustainable global economy does not begin and end in China.