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&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&P 500 in recent
years, climbing by almost 129% since the beginning of 2009, compared with the
S&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. The Economist
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