CanChinaBraveaUSDownturn(E).docVIP

Can China Brave A U.S. Downturn? David Roche How symbiotic are the Chinese and American economies? If the U.S. economy catches cold, will China get the flu? At first sight this might seem a simple question with a simple answer. Work out how much the U.S. buys from China, cut the growth of U.S.s imports from China in half and presto, see what is the hit to Chinas GDP. The answer would be a 2% loss, if one assumes as a worse case scenario that U.S. imports from China fall to a 5% annual growth rate from 20%. That would cut Chinas GDP growth to 8% from 10%－no big deal. But this would be the wrong answer. The real world is more complicated. A few of the more arcane considerations that cannot be ignored are: What could plug the hole in Chinas GDP made by a decline in export growth to the U.S.? What would a U.S. slowdown mean for other factors, such as foreign direct investment in China? What policy actions could China take to palliate the loss? The analysis is only made more difficult by the fact that Chinas economic statistics dont add up. This provides a good starting point! Let us ask ourselves the question: If Chinese exports were to weaken, could domestic demand make up the difference? According to Chinas economic statistics the answer is, no way. Consumption in China is on a weakening trend as a proportion of GDP. As the graph nearby shows, exports and investment are the real drivers of the economy. My own observation from working in China is that investment and savings is likely to be overstated, probably by inclusion in investment of a lot property transactions which are rightly transfers and not part of GDP, and therefore the contribution of the consumer is understated. There is, of course, no way of proving this. But both rural and urban household incomes have been rising smartly, and China is a lot further down the road to creating a consumer society than the shrinking proportion of GDP that the statisticians attribute to the Chinese consumer would indicate.