The implications of China’s slowdown
Autor: Canal da Casa | Publicado: 2012-08-28T19:45:00-03:00




Sinodependency

Teenage angst



Aug 25th 2012              | Hong Kong 
                    | from the print edition









CHINA, an ancient civilisation, is still in its economic 
adolescence, a phase marked by growth spurts and mood swings. Other 
emerging economies endure this awkward period in relative obscurity, 
attracting only cursory attention. China has no such luck. It has become
 big before becoming rich, inviting scrutiny typically reserved for 
mature economies.
China may not be a member of the G7 group of big, rich democracies. 
But it is already a member of the so-called S5, or Systemic Five, a 
group of economies subject to extra IMF attention because of their 
“systemic” significance. China, according to the fund, is the most 
“central” trading power in the world, based on its extensive trade links
 to other economies that are themselves tightly interwoven. It is the 
biggest or second-biggest trading partner for 78 countries. Its appetite
 for imports, especially the base metals and oil that feed its vast 
industrial machine, flatters the exports of countries as far afield as 
Azerbaijan and Angola.
Trade is not the only measure of China’s economic influence. Many 
foreign companies have set up shop inside the country, profiting from 
its market without having to export to it. To obtain a broader measure 
of multinational exposure to the Middle Kingdom, The Economist
 has prepared a stockmarket index made up of 135 S&amp;P 500 companies, 
weighted by China’s reported share of their revenues. (For companies 
that report revenues only for the Asia-Pacific region as a whole, we 
have assumed China’s share of regional revenues reflects its share of 
the region’s GDP.)




This new and improved “Sinodependency” index has massively 
outperformed the S&amp;P 500 in recent years, climbing by almost 129% 
since the beginning of 2009, compared with the S&amp;P 500’s gain of 57%
 (see chart 1). It has also performed far better than China’s own 
stockmarkets. Buying American firms exposed to China may be a better 
investment strategy than buying Chinese firms themselves. That is just 
as well, because foreign participation in China’s stockmarkets is still 
circumscribed.
China’s precocious economy has, however, turned sullen and morose of 
late. The preliminary results of HSBC’s August survey of over 420 
manufacturing firms, many of them private, showed orders falling and 
inventories backing up. The ratio of orders to inventories was at its 
worst since December 2008. This disappointment followed the announcement
 that house prices rose in 49 out of 70 cities last month, a revival 
deemed bad news as it might delay further monetary easing.
A sharp slowdown in Chinese investment was one of the risks examined 
by the IMF in a report this month on the systemic five. Ashvin Ahuja and
 Malhar Nabar of the fund have calculated the impact on China’s trading 
partners of a one-percentage-point slowdown in Chinese capital 
formation. In the second chart, we have extrapolated their results. Our 
baseline is the IMF’s 2012 growth forecasts for each country (made back 
in April, a happier time). The chart shows the effect on growth of a 
soft landing, which we define as a two-percentage-point slowdown in 
China’s investment growth. It also depicts a harder landing, which we 
define as a 3.9-point slowdown, the same as it endured in 2008.



    
    
  

A hard landing would hobble South Korea and bring Taiwan’s growth to a
 shuddering halt. But growth in Brazil and Australia would hold up 
surprisingly well, perhaps because their currencies would fall, 
absorbing some of the shock. However, these estimates capture only the 
direct impact of a Chinese slowdown, as transmitted through its trade 
links. Messrs Ahuja and Nabar point out that stockmarkets around the 
world would also swoon. And some countries would be hit by indirect 
effects: Germany, for example, would suffer both a loss of exports to 
China and to countries that sell a lot to China. Adolescents have an 
uncanny ability to spoil things for everybody.




Dependence on China

The indispensable economy?

China may not matter quite as much as you think


Oct 28th 2010              | Hong kong

                    | from the print edition          











THE town of Alpha in Queensland, Australia, has only 400 
residents, including one part-time ambulance driver and a lone 
policeman, according to Mark Imber of Waratah Coal, an exploration firm.
 But over the next few years it should quintuple in size, thanks to an 
A$7.5 billion ($7.3 billion) investment by his company and the 
Metallurgical Corporation of China, a state-owned firm that serves 
China's mining and metals industry. This will build Australia's biggest 
coal mine, as well as a 490km (300-mile) railway to carry the black 
stuff to the coast, and thence to China's ravenous industrial maw.
It is hard to exaggerate the Chinese economy's far-reaching impact on
 the world, from small towns to big markets. It accounted for about 46% 
of global coal consumption in 2009, according to the World Coal 
Institute, an industry body, and consumes a similar share of the world's
 zinc and aluminium. In 2009 it got through twice as much crude steel as
 the European Union, America and Japan combined. It bought more cars 
than America last year and this year looks set to buy more mobile phones
 than the rest of the world put together, according to China First 
Capital, an investment bank.
In China growth of 9.6% (recorded in the year to the third quarter) 
represents a slowdown. China will account for almost a fifth of world 
growth this year, according to the IMF; at purchasing-power parity, it 
will account for just over a quarter.

For the first 25 years of its rise, China's influence was most 
visible on the bottom line of corporate results, as it allowed firms to 
cut costs. More recently it has become conspicuous on the top line. 
Audi, a luxury German carmaker, sold more cars in China (including Hong 
Kong) than at home in the first quarter. Komatsu of Japan has just won 
an order for 44 “super-large dump trucks” from China's biggest coal 
miner.


The Economist has constructed a “Sinodependency index”, 
comprising 22 members of America's S&amp;P 500 stockmarket index with a 
high proportion of revenues in China. The index is weighted by the 
firms' market capitalisation and the share of their revenues they get 
from China. It includes Intel and Qualcomm, both chipmakers; Yum! 
Brands, which owns KFC and other restaurant chains; Boeing, which makes 
aircraft; and Corning, a glassmaker. The index outperformed the broader 
S&amp;P 500 by 10% in 2009, when China's economy outpaced America's by 
over 11 percentage points. But it reconverged in April, as the Chinese 
government grappled with a nascent housing bubble. 
China is, in itself, a big and dynamic part of the world economy. For
 that reason alone it will make a sizeable contribution to world growth 
this year. The harder question is whether it can make a big contribution
 to the rest of the world's growth. 
China is now the biggest export market for countries as far afield as
 Brazil (accounting for 12.5% of Brazilian exports in 2009), South 
Africa (10.3%), Japan (18.9%) and Australia (21.8%). But exports are 
only one component of GDP. In most economies of any size, domestic 
spending matters more. Thus exports to China are only 3.4% of GDP in 
Australia, 2.2% in Japan, 2% in South Africa and 1.2% in Brazil (see 
map).


Export earnings can, of course, have a ripple effect throughout an 
economy. In Alpha, the prospect of selling coal to China is stimulating 
investment in mines, railways and probably even policing. But these 
“multipliers” are rarely higher than 1.5 or 2, which is to say, they 
rarely do more than double the contribution to GDP. Moreover, just as 
expanding exports add to growth, burgeoning imports subtract from it. 
Most countries outside East Asia suffered a deteriorating trade balance 
with China from 2001 to 2008. By the simple arithmetic of growth, trade 
with China made a (small) negative contribution, not a positive one. 
China plays a larger role in the economies of its immediate 
neighbours. Exports to China accounted for over 14% of Taiwan's GDP last
 year, and over 10% of South Korea's. But according to a number of 
studies, roughly half of East Asia's exports to China are components, 
such as semiconductors and hard drives, for goods that are ultimately 
exported elsewhere. In these industries, China is not so much an engine 
of demand as a transmission belt for demand originating elsewhere.
The share of parts and components in its imports is, however, 
falling. From almost 40% a decade ago, it fell to 27% in 2008, according
 to a recent paper by Soyoung Kim of Seoul National University, as well 
as Jong-Wha Lee and Cyn-Young Park of the Asian Development Bank. This 
reflects China's gradual “transformation from being the world's factory,
 toward increasingly being the world's consumer,” they write. Gabor Pula
 and Tuomas Peltonen of the European Central Bank calculate that the 
Philippine, South Korean and Taiwanese economies now depend more on 
Chinese demand than American. 
Trade is not the only way that China's ups and downs can spill over 
to the rest of the world. Its purchases of foreign assets keep the cost 
of capital down and its appetite for raw materials keeps their price up,
 to the benefit of commodity producers wherever they sell their wares. 
Its success can boost confidence and productivity. One attempt to 
measure these broad spillovers is a paper by Vivek Arora and Athanasios 
Vamvakidis of the IMF. According to their estimates, if China's growth 
quickened by 1 percentage point for a year, it would boost the rest of 
the world's GDP by 0.4% (about $290 billion) after five years. 
Since the crisis, China has shown that its economy can grow even when
 America's shrinks. It is not entirely dependent on the world's biggest 
economy. But that does not mean it can substitute for it. In April the 
Bank Credit Analyst, an independent research firm, asked what would 
happen if China suffered a “hard landing”. Its answer to this 
“apocalyptic” question was quite “benign”. As it pointed out, Japan at 
the start of the 1990s accounted for a bigger share of GDP than China 
does today. Its growth slowed from about 5% to 1% in the first half of 
the 1990s without any discernible effect on global trends. It is hard to
 exaggerate China's weight in the world economy. But not impossible.



from the print edition | Finance and economics &nbsp; &nbsp;







Free exchange

Chains of gold

Modern supply chains are making it easier for economies to industrialise

Aug 4th 2012                    | from the print edition          














    
    
  

GETTING rich used to be tough. For most of the past two centuries, 
few countries managed it. Lant Pritchett, an economist now at Harvard’s 
Kennedy School of Government, wrote in 1997 that “divergence, big time” 
between the rich and the rest was “the dominant feature of modern 
economic history.” But those stubborn gaps have begun to close. 
Industrialisation is suddenly everywhere. Since the mid-1980s, emerging 
markets have grown faster than advanced economies (see chart).
Liberal reforms and sound macroeconomic management surely helped. Yet
 recent research by Richard Baldwin of the Graduate Institute in Geneva 
suggests it is not so much the developing world that has changed as 
development itself. Today’s emerging markets face a different sort of 
globalisation than their predecessors 50 or 100 years ago.

In this section

Japanese lessons
Money for nothing
Promises, promises
Corn on the cusp
Blood in the water
Too big to veil
»Chains of gold


Reprints

Related topics


Japan
Business
Economics
Globalisation
Richard Baldwin



Most advanced economies industrialised as part of what Mr Baldwin 
calls globalisation’s first great unbundling: the geographical 
separation of producers and consumers. Early in the industrial era, high
 transport costs restricted trade. Expensive shipping limited most 
manufacturers to sales within the same city or country. But as the 
industrial revolution progressed, steamships and railways slashed 
transport costs, exposing firms to foreign competition for the first 
time. The most productive firms were those best able to take advantage 
of economies of scale. A single large plant could produce goods at a 
lower unit cost than lots of smaller factories, and a cluster of large 
suppliers at lower cost still. Production clustered in massive cities in
 a few economies.
Catching the leaders meant building an entire supply chain from the 
ground up—and in the teeth of competition. Development was slow, 
laborious and rare. Japan and South Korea grew industries from modest 
beginnings. They entered global markets with inferior but cheap 
products, often supported by state aid, then slowly improved their 
technical competence. Painstaking accumulation of technological skill 
eventually enabled innovative multinational firms to emerge. Japanese 
and South Korean incomes converged with those in western Europe. Other 
emerging economies tried gamely to duplicate this success, to little 
avail. Aggressive industrial policies often strained government 
resources without delivering a critical mass in industry or the human 
capital needed for development.
A new model began to emerge in the 1980s. Lower transport costs were a
 catalyst. Yet more important, reckons Mr Baldwin, was a budding 
revolution in information and communication technology (ICT). Cheaper 
communications allowed firms to manage supply chains over ever greater 
distances. Companies discovered they could build plants in cheap 
locations, ship components there to be assembled and export the finished
 product around the world. While the first unbundling separated 
producing markets from consuming markets, the second broke up production
 entirely across long, multinational supply chains.
That made industrialisation a cakewalk compared with earlier times. A
 business-friendly government and cheap workers were often sufficient to
 get started; foreign firms provided technology and management. Emerging
 markets quickly signed on. Trade data analysed by Robert Johnson of 
Dartmouth College and Guillermo Noguera of Columbia University track the
 shift. Along multinational supply chains, they note, a single component
 may be exported several times, adding to tallies of gross trade but not
 to measures of value added. A fall in the ratio of the two measures 
(which they call the VAX) signifies an increase in supply-chain 
fragmentation. On this score, 1990 seems a critical point, after which 
the VAX sinks while trade volumes soar (see chart). Emerging-market 
growth surged at roughly that time.
Faster growth may be fickle growth, says Mr Baldwin. Whereas previous
 tigers built a deep technological capacity, many emerging markets now 
merely “borrow” technology from rich-world firms. Multinationals have an
 incentive to limit technology transfer, the better to preserve the 
bargaining power that comes with a credible threat to leave. Learning 
can still occur. China uses its size as leverage to extract concessions,
 often confining direct inward investment to joint ventures between 
foreign and domestic firms, for instance. Smaller markets lack that 
option. The limited spillovers from supply-chain industrialisation may 
leave them stuck in middle-income status. And there is always the risk 
that chains may shift again, leaving them high and dry.
Some worry that sprawling supply chains may allow ill winds from 
abroad to blow in more easily. But evidence suggests that supply-chain 
trade may have declined less and recovered faster than overall trade 
during the financial crisis. Japan’s 2011 earthquake echoed across the 
world but also demonstrated the system’s capacity for quick recovery. 
The more tenuous nature of supply-chain industrialisation may encourage 
governments to work harder to support trade and recovery in response to a
 crisis.
Ships and chips
The second unbundling has yet to banish distance. In a different 
paper, Messrs Johnson and Noguera find that supply-chain fragmentation 
has been greatest among neighbours. This has given rise to regional 
industrial clusters. Regional trade agreements are partly responsible, 
but time costs may be more important. ICT improvements have also made 
production more nimble, capable of just-in-time manufacturing and 
frequent design changes. Timely shipments of components are 
indispensable. Indeed, an analysis by David Hummels of Purdue University
 and Georg Schaur of the University of Tennessee estimates that a day in
 transit is equivalent to a tariff of between 0.6% and 2.3%, with the 
largest effects for parts and components trade. Industrialisation is now
 within easy reach of poor countries, provided they’re within easy reach
 of industrialisation.
Economist.com/blogs/freeexchange


Sources


Richard Baldwin, “Trade
 And Industrialisation After Globalisation's 2nd Unbundling: How 
Building And Joining A Supply Chain Are Different And Why It Matters”, NBER Working Paper No. 17716, December 2011
Robert C. Johnson, Guillermo Noguera, “Fragmentation and Trade in Value Added over Four Decades”, NBER Working Paper No. 18186, June 2012
Robert C. Johnson and Guillermo Noguera, “Proximity and Production Fragmentation”, American Economic Review, Vol. 102, No. 3, May 2012
David Hummels, Georg Schaur, “Time as a Trade Barrier”, NBER Working Paper No. 17758, January 2012