BEIJING (Reuters) - If the United States slides into recession, don’t count on China to save the world.
The fastest-growing major economy for two decades straight, China looks resilient enough to withstand a serious U.S. slowdown and still expand at close to 10 percent a year.
Yet that would be a slight let-up from the scorching pace to which the world has become accustomed. There would be no extra pop and fizz from China to fill in for the United States, many economists say.
“What China has already contributed to global growth and whether China could offer extra momentum are two separate issues, said Dong Tao, chief China economist at Credit Suisse in Hong Kong. “The question is, will China offer the additional orders in case U.S. consumption sees incremental decline? I doubt that.”
The International Monetary Fund says 2007 will mark the first year that China contributes more to global growth than any other country, measured according to market GDP weights.
And it forecasts that China will steam further ahead as the main engine for expansion next year. Tellingly, however, the fund projects a dip in Chinese growth to 10.0 percent in 2008 from a 13-year high of 11.5 percent this year.
“It’s not that China is accelerating, it’s just decelerating less”, Tao said.
Half of what China buys from abroad is raw materials and parts to make goods it in turn sells overseas.
So if there was a big fall in U.S. consumption of Chinese products — $288 billion last year by Washington’s count — China’s appetite for commodities and electronic components might begin to look merely massive as opposed to infinitely voracious.
“If demand for China’s steel exports weakens, would China still need to import as much iron ore?” Mingchun Sun at Lehman Brothers in Hong Kong asked.
Although there is a lively debate about the extent to which its economic fortunes have decoupled from America’s, China clearly has less to fear from the U.S. economy hitting the skids than it did just a few years ago.
In the first half of 2007, China for the first time exported more to the European Union than to the United States. Its exports to Asia and emerging markets, from the Middle East to Africa and Latin America, have also powered ahead.
“Thus, while we expect China’s export growth to the U.S. to slow further, we still think overall trade growth should remain reasonable,” Macquarie analyst Paul Cavey said in a note.
Asia as a whole should also be better insulated than in the past from a protracted U.S. slowdown thanks to strong and improved fundamentals, according to economists at Goldman Sachs.
In a recent report, the bank concluded that the case for holding Asian currencies and equities was strong.
Still, much will depend on how China responds to a chill wind from America. Will it pump up public spending to support demand as it did after the 1997/98 Asian financial crisis? Will it spur consumption by letting the yuan rise faster or, conversely, will it shield its exporters by slowing the currency’s rate of climb?
Crucially, Chinese exporters might well try to make up for a shortfall in American sales by turning inwards and pitching their products at Chinese businesses and consumers.
In doing so, they would displace Chinese purchases of both intermediate and final goods from abroad.
Import substitution is already happening in China’s steel, paper, car and machinery sectors, and it could gather pace if the American market dries up, Sun at Lehman said.
“There will be more import substitution in China, more and more goods produced locally,” he said.
This is also the view of Dominique Dwor-Frecault at ABN AMRO in Singapore, who analyzed data showing that Chinese exports to Asia have expanded strongly over the past five years, whereas the growth of Asian exports to China has slowed.
Asia was able to fall back on strong Chinese demand in 2002-3 when exports to the United States dropped, but there are doubts that the same support would kick in the next time around.
“The substitution of domestically produced intermediate goods to imported ones is a long-term trend,” she said. “Hence China is no longer likely to supply a hedge to Asia against slower U.S. and EU growth.”
Sun at Lehman arrived at a similar verdict: “Strong growth in China may not provide a thick cushion for the rest of Asia.”