If you look at any of the lists of the many things that might go wrong for markets and economies in 201, you’ll find “China slows” or “China collapses” pretty near the top of all of them.
It makes sense to think it might happen – it obviously isn’t possible for China to grow at 10% a year forever. Land prices in Beijing have risen 800% in the last seven years, says Société Générale’s Dylan Grice, which should be pretty much all the evidence you need that the country is little more than a “giant construction site financed by sharply negative real interest rates”.
That’s the kind of growth that rarely ends well – just ask Ireland, Iceland, Spain and America. However, as the once-small group of China bears begins to grow (regular readers will know that I’m with the bears) it might be time to ask whether a slowdown – or even a huge collapse – in growth in China really be that big a deal for the rest of us? Conventional wisdom says it would be. China now makes up around 8% of the world’s GDP and its numbers make up much of the growth in that GDP. Lose that, say the economists, and we will all suffer.
I’m not so sure. Cast your mind back, if you can bear it, to the Japanese collapse of 1989. At the time Japan accounted for around 17% of GDP (it now accounts for just less than China). It was the second largest economy in the world and, after two decades of driving GDP growth at 8%-10% a year, it was a massive contributor to global growth. At the time it didn’t occur to anybody that this trend might slow. Instead, everyone simply assumed that the Japanese had found a magic money-tree and that growth would continue forever.
However, had anyone actually been contrarian enough to imagine Japan’s stock market crash, property price collapse and 20 years worth of minimal GDP growth, they would have expected the consequences to be pretty hideous for the rest of us. As Chinese market specialist Michael Pettis, of Peking University’s Guanghua School of Management, points out, they would have thought that global growth would collapse with Japanese growth.
But that is not what happened: the world grew very nicely all the way through the 1990s. Analysts, says Pettis often confuse a country’s “share of global growth with their contribution to global growth”. Japan might have been growing very fast itself, but what it was not doing was stimulating other countries to grow: as it had a huge trade surplus (it exported much more than it imported) it effectively “absorbed more global demand” than it created. Japan created no net global demand.
You can even take this argument a little further, as Pettis does, and note that, over the next 20 years, Japan’s trade surplus as a percentage of global GDP halved. So its “deficiency in net demand” also halved, something that “would have provided an expansionary boost to the global economy”.
This is not to say that Japan’s collapse caused global growth in the 1990s. Of course it didn’t. The arrival of the internet, the opening up of the Soviet Union, plus the beginning of the global credit and housing bubbles did that. It is just to say that the nature of the slowdown was not necessarily contractionary for the rest of the world.
Now go back to China. Look at it – and its massive trade surplus – through the Japanese prism. As a huge net exporter, China is dependent on the US for its growth (it needs the rest of us to buy its goods) but the truth is that the rest of us aren’t dependent on China for our growth. So if China suddenly sees low or even zero growth – along with a falling trade surplus (this is the crucial bit) – would it actually be that bad for the world as a whole, given that the size of its trade surplus rather suggests that it too isn’t creating any net global demand?
It would have nasty knock-on effects in some areas. Demand for commodities would fall along with Chinese growth (if you aren’t building cities, you don’t need much copper). Then prices would fall too. That would be nasty for commodity exporters such as Australia and Canada, and it would be bound to give all equity markets a very nasty short-term shock. Let’s not forget that the FTSE 100 is stuffed with resource stocks. But falling commodity prices wouldn’t be all bad.
If China wasn’t persisting with breakneck growth of 10% a year, would global inflation really be the second thing on everyone’s risk list for 2011? All commodity importers would benefit from falling prices. That might mean that the nasty drop in our real incomes we are currently living with would slow and that our central banks would be under less pressure to raise rates into a fragile recovery. I’m not suggesting that a slowing China wouldn’t cause pain – if you mine metals or are over exposed to Shanghai property it certainly would. But it might not be quite the appalling kind of shock to global growth people think it would be.
• This article was first published in the Financial Times