Opinion: China may be wobbly, but it’s only thing standing between us and recession

China accounts for about half of global economic growth, Stephen Roach says

NEW HAVEN, Conn. (Project Syndicate) — Is the Chinese economy about to implode? With its debt overhangs and property bubbles, its zombie state-owned enterprises and struggling banks, China is increasingly portrayed as the next disaster in a crisis-prone world.

I remain convinced that such fears are overblown, and that China has the strategy, wherewithal, and commitment to achieve a dramatic structural transformation into a services-based consumer society while successfully dodging daunting cyclical headwinds. But I certainly recognize that this is now a minority opinion.

For example, U.S. Treasury Secretary Jacob J. Lew continues to express the rather puzzling view that the United States “can’t be the only engine in the world economy.” Actually, it’s not: the Chinese economy is on track to contribute well over four times as much to global growth as the U.S. this year. But maybe Lew is already assuming the worst for China in his assessment of the world economy.

So what if the China doubters are right? What if China’s economy does indeed come crashing down, with its growth rate plunging into low single digits, or even negative territory, as would be the case in most crisis economies? China would suffer, of course, but so would an already-shaky global economy.

With all the hand wringing over the Chinese economy, it’s worth considering this thought experiment in detail.

For starters, without China, the world economy would already be in recession. China’s growth rate this year appears set to hit 6.7% — considerably higher than most forecasters have been expecting. According to the International Monetary Fund — the official arbiter of global economic metrics — the Chinese economy accounts for 17.3% of world gross domestic product (measured on a purchasing-power-parity basis).

A 6.7% increase in Chinese real GDP thus translates into about 1.2 percentage points of world growth. Absent China, that contribution would need to be subtracted from the IMF’s downwardly revised 3.1% estimate for world GDP growth in 2016, dragging it down to 1.9% — well below the 2.5% threshold commonly associated with global recessions.

Of course, that’s just the direct effect of a world without China. Then there are cross-border linkages with other major economies.

The so-called resource economies — namely, Australia, New Zealand, Canada, Russia, and Brazil — would be hit especially hard. As a resource-intensive growth juggernaut, China has transformed these economies, which collectively account for nearly 9% of world GDP.

The IMF currently projects that these five economies will contract by a combined 0.7% in 2016, reflecting ongoing recessions in Russia and Brazil and modest growth in the other three. Needless to say, in a China implosion scenario, this baseline estimate would be revised downward significantly.

Full article: Opinion: China may be wobbly, but it’s only thing standing between us and recession (MarketWatch)

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