China on a Diet as Consumption Drops?
Figures published Wednesday on China's economy show the country doing worse than the World Bank previously anticipated, boding poorly for China's chances of avoiding the global downturn as well as for the West's hopes of possible bailout assistance from Asia.
Both exports and imports have dropped significantly, the figures showed. The Economist:
The gloom is spread all over the place. Exports dropped across all big traded goods and all parts of the world. Exports to America fell by 6.1 percent; those to the ASEAN countries, which had grown by 21.5 percent in October, fell by 2.4 percent. The faster decline in imports meant that China’s monthly trade surplus reached a record $40.1 billion. Exports last fell in 2001.
Such numbers would be nasty enough for any big economy, but they are particularly shocking because China’s racing trade has been an engine of world trade, and thus global growth. During the 1990s China’s exports grew at an annual average of 12.9 percent; from 2000 to 2006 that growth nearly doubled to 21.1 percent each year, according to the World Bank. China's rapidly rising imports have also driven growth elsewhere. The chief economist of a Chinese bank calls the latest figures "horrifying."
The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceding months; exports grew by more than 19 percent from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.
Because exports comprise roughly 40 percent of China's GDP (compared to 29 percent in the UK and 11 percent in the U.S.), the country remains much more vulnerable to a decrease in global demand than Western economies.
Perhaps more alarming, though, is the drop in imports. Analysts have stressed that government efforts to boost domestic consumption will be particularly important next year, as the expected economic downturn will likely further reduce demand for Chinese exports. Additionally, Merrill Lynch recently warned that oil could fall below $25 a barrel "if the recession affecting the U.S., Europe, and Japan extended to China, the main driver of demand growth in commodity markets in recent years." This could have negative consequences on creditor countries like Russia and Saudi Arabia as well.
Although Chinese retail sales initially grew after the announcement of a massive stimulus plan in November, the package has been criticized for focusing too much on construction and other short-term fixes rather than encouraging consumer spending. The WSJ adds that it emphasizes infrastructure at the expense of social services:
In its drive to avoid a sharp economic downturn, China plans to spend 4 trillion yuan ($581 billion) on a stimulus package that focuses on railways, airports, and other hard assets. But just 1 percent of that sum is going to increased social services.
That balance needs to be corrected, many scholars say, if China is to keep growing rapidly and improving living standards in the years ahead. More spending by its own consumers would both support growth and reduce reliance on exports, but that isn't going to happen unless the government eases the burden on families to provide for education, health care, and old age.
It's easy to understand why China is investing so heavily in infrastructure. Construction is the part of the economy that has slowed most sharply, and thus is most in need of support. Putting money into infrastructure has a quick payoff and is a tested strategy that China employed in 1998 to pull out of the Asian financial crisis.
But improving infrastructure may not be enough to support long-term growth – especially in China, which already has one of the highest investment rates of any major economy. Some worry that China could eventually go down the same road as Japan, which kept spending even after officials ran out of worthwhile projects.
Domestic consumption is expected to remain key to China's handling of the financial crisis. Even a much-speculated devaluation of the yuan may not be enough to solve China's woes, the Economist warns. If export growth continues to plateau into 2009, the resulting surge in unemployment could become a major source of social instability.
Peter Cassata is an assistant editor at the Atlantic Council.