Economists say a global slowdown will largely spare a mainland economy still based on domestic consumption and cushioned by vast cash reserves
by Frederik Balfour
The Year of the Rat has certainly gotten off to a less than auspicious start for China. The country got buffeted by the worst winter storms in half a decade, causing food prices to soar and pushing inflation to an alarming 8.7% in February (BusinessWeek, 3/11/08). The Shanghai Composite Index is off 30% since the beginning of 2008, and property prices have started falling in several major cities. China’s heavy economic involvement with the internationally unpopular regime in Sudan (BusinessWeek, 2/13/08), and most recently the bloodshed in Tibet (BusinessWeek, 3/17/08) threaten to spoil the country’s Olympic parade.
Now comes the U.S. bear market and housing collapse. If you heap this looming U.S. recession onto the litany of China’s other woes does it spell a recipe for a total China meltdown? Don’t bet on it. In fact, analysts say that the question of decoupling—the notion that China is contagion free from a global slowdown—is actually a misnomer, since "historically, the Chinese economy has never been coupled," says Jonathan Anderson, Asian chief economist at UBS.
So questions of semantics aside, what’s really going on? The answer is that while China is widely viewed as an export powerhouse, selling everything from garden gnomes to laptop computers overseas, most of its economic growth is still fueled by domestic investment and consumption, neither of which has shown much sign of slowdown so far. Anderson reckons that China’s gross domestic product growth will slow to 10% this year, down from 11.4% in 2007, hardly the kind of slump to cause serious concern for Beijing.
A More Open Economy
Still, the Chinese economy is far more open than it was during the last U.S. recession of 2001. Back then, exports accounted for just 8.4% of gross domestic product and today it’s about 40%. The European Union is China’s biggest export market, with 20%, just ahead of the U.S. with 19%, while Japan and the rest of Asia take 25%, says Michael Spencer, Asia chief economist at Deutsche Bank. He’s estimating growth will slow to 9.5% this year, but only half of that decline will be due to a slower increase in the growth of China’s trade surplus.
The reason the linkages from the trade sector to the rest of the economy aren’t greater stems from the fact that domestic content only accounts for 25% of exports. Another is that although the export sector accounts for 80 million jobs, the sector most likely to get badly hurt is light manufacturing, which accounts for about 6.5% of total employment in China, while the export sector as a whole accounts for just 5% of total investment, says Anderson.
Bear in mind too that China continues to amass huge amounts of foreign exchange. In January alone reserves jumped $61.6 billion, bringing the country’s cash hoard to $1.589 trillion. That’s quite a pile available to the government should the need arise to prime the pump of an ailing economy. But that is highly unlikely, says JPMorgan (JPM) China economist Frank Gong. "Investment growth, loan growth, consumption growth, and China growth are strong," he says.
The Chinese proclivity to sock away huge amounts of savings provides a further cushion to a downturn. That means the disturbingly high degree of leverage that got U.S. hedge funds and households into the subprime mess is a problem quite unknown in China where the minimum mortgage down payment is 30%. "Residential mortgages are probably the best asset in the banking sector," says Ryan Tsang, senior director of banking research at Standard & Poors (MHP).