Can China save rising Asia from recession?

By Jayati Ghosh

(August 13 , New Delhi, Sri Lanka Guardian) Before the global financial crisis intensified in September 2008, the "decoupling" hypothesis was very popular among mainstream economic commentators. This essentially argued that China (and to a lesser extent India) by virtue of their recent rapid growth and even more potential for future growth, had emerged as alternative growth poles for the global economy, and could take up the slack if and when growth in the United States and other developed economies faltered.

The immediate aftermath of the crisis proved that thesis to be misplaced, as the developing economies of Asia were significantly hit by the slowdown in world exports. Indeed, the subsequent synchronicity of growth rates across the different regions of the world was so marked that it was unprecedented in the long history of booms and slumps in global capitalism.

But very recent trends in retail sales and output have once again created a perception that developing Asia will buck the trend, and come out of the downswing faster onto a new growth trajectory. In particular, recent economic indicators from China have been so robust that they have inspired both awe and optimism. The view is gaining ground that even if the Chinese economy is still too small to act as an engine of growth for the world, it can play that role for the Asian developing region. This is reinforced by the increasing trade and investment integration of China with other countries in developing Asia, especially in east and southeast Asia.

Certainly it appears that the fairly large fiscal stimulus of the Chinese government, along with other measures to ease interest rates and increase credit access, have worked in terms of increasing both domestic demand and economic activity in China. Thus, while exports have slumped in response to the global trend, domestic demand and retail sales have picked up. As a result, preliminary data for the second quarter of 2009 suggest that gross domestic product (GDP) is growing by nearly eight per cent at an annualised rate, and industrial production in June was 10.7 per cent higher than it was in the same month of the previous year.

Of course, the question remains of the extent to which the extent to which this growth in China will translate into growth in developing Asia as a whole. This region is currently the most export-dependent part of the world. China is the most striking example of this, but most other countries, even those that are currently running trade deficits, see exports as the engine of their growth. Yet exports have slumped quite sharply, turning negative across the region and especially so in southeast Asia.

The view that China can generate external demand for other countries in Asia comes from the shift in the direction of trade that has been occurring over the past two decades, and especially since 2000. The share of China and other intra-Asian trade in the exports of developing Asia increased very sharply between 2000 and 2007 while the share of the main developed countries (US, European Union and Japan) fell. China and other developing Asian countries now account for more than half the exports of southeast Asia, 42 per cent of the exports of east Asia and nearly 30 per cent of the exports of south Asia. This has led to the view that export-led growth can continue to be the strategy for this region, but with a redirection of exports within the region and especially to China.

However, there are several reasons to consider such a view to be excessively optimistic. To begin with, China’s exports and imports have tended to move together, and this is largely because an increasing share of exports (more than 60 per cent in 2007) consists of processing exports, in a process which uses imported raw material and intermediates from other countries to transform into final goods for export. In fact, while Chinese exports have declined because of the slump in global trade, Chinese imports have fallen even faster! As a result, the trade surplus is actually increasing, to reach a projected level of around $370 billion in 2009.

The other reason to be sceptical of the ability of China to become an alternative growth engine for the region as a whole is because most of the trade, both imports and exports, that is occurring within developing Asia (including China) as a whole is part of a vertically disintegrated production process that is producing final goods for export to developed countries.

Recent research has shown that in terms of final demand, only around one-fifth of the entire region’s exports end up within the region. Nearly 60 per cent of exports are intended for final demand to the Big Three: the US, European Union and Japan. So the slump in imports in these major markets, which is likely to continue for some time, will definitely affect the region. Looking at only the gross exports of other countries in developing Asia to China without considering the role such exports played in the production chain for final export to the developed world will not provide the correct picture.

This does not mean that China’s recent economic expansion will not have any positive impact upon the other developing countries in the region. Certainly it will provide some relief especially to raw material and some intermediate goods exporters. But it would be foolish for developing countries in Asia to see this as a reason for continuing with the earlier strategy based on very high export dependence, since this is likely to prove unsustainable.

-Sri Lanka Guardian