Getting the facts right on China’s slowdown

Posted by Peter Drysdale on 13 February 2009

Examples of shoddy commentary on the impact of the global financial-crisis-induced downturn in the Chinese economy abound. So a comment on the piece run in Australia’s Sydney Morning Herald over the weekend by the Lowy Institute’s Malcolm Cook is required to head off more confusion.

 

Cook makes the claim that the IMF forecasts for 2009 suggest that ‘China may suffer a larger drop-off in growth, in absolute terms (my italics), than the United States, Japan or the European Union. Among major economies only Russia is predicted to fall more. This year China may deliver half of the 13 per cent growth in 2007. The US economy would have to shrink by about 4 per cent this year to match China’s fall’.

 

It’s difficult to know where to start with these leaps and bounds in logic.

 

First, the IMF suggests no such thing. Were it to do so, it would have even less credibility than unfortunately is its current muster.

 

The US economy does, by the way, appear to have shrunk by 4 per cent (3.8 per cent to be precise) so it has achieved Cook’s dubious benchmark.

 

Accepting Cook’s growth numbers, America will subtract US$525billion out of world GDP through this phase of this event while China will add US$458billion to it (calculated from World Bank figures). The American recession is deep and will have a direct and deep negative impact on world GDP. China will continue to grow and have a quite strong positive impact on world GDP in this period. The slowdown in growth in China, whatever its eventual size, will nonetheless have adverse multiplier effects in the world economy but the suggestion that these effects will be bigger than those of the collapse in America (not to mention Europe and Japan) does not bear scrutiny.

 

Cook has a reasonable point to make about the conjuncture of sensitive political anniversaries in China this year and the downturn in growth performance. But his flawed logic sustains neither this nor other more doubtful observations in the piece.

 

Under Cook’s ‘lose-lose’ scenario, he asserts that ‘China’s exports are falling but so is domestic demand’. Cook talks about “this bad case scenario hold[ing] out a more politically tense China, greater acrimony between our largest trading partner and our security guarantor and sharp falls in demand for our natural resources, education and tourism exports.”

 

Cook’s ‘lose-lose’ scenario on the Chinese economy asserts that “China’s exports are falling but so is domestic demand”. Exports have fallen but were up 10 per cent year-on-year. China just published its domestic demand data (in terms of retail trade) for Nov-Dec 2008, and this was up in real terms by 17.5% over the same period last year. Exports fell slightly in Nov and Dec 08, but for the full year exports will still be more than 10% up on the year before (year on year to October ‘08 they were up 13%).

 

And his conclusion that all this makes for ‘a bad case scenario (with) a more politically tense China, greater acrimony between our largest trading partner and our security guarantor and sharp falls in demand for our natural resources, education and tourism exports’ needs more careful scrutiny.

 

On the former, these circumstances provide Obama’s America with the chance of deeper engagement with China on this and other issues.

 

On the latter, in fact, demand for student places and tourism is up (boosted by the weaker A$) and while export prices and values are being clobbered by the collapse in commodity spot prices, export volumes will hold up and be cushioned somewhat by long term contracts. Australia’s market share is likely to increase instead of fall, however nasty the negotiations are likely to become as things get relatively tough compared to the unsustainable breeze of the last few years.

 

This is only the beginning of the story but getting these facts right makes it clear that the industrial world, not China, will be the biggest drag on the world economy over coming months.

 

Peter Drysdale
Emeritus Professor of Economics and Visiting Fellow in Policy and 
Governance in The Crawford School of Economics and Government