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Without China, the world will be in recession

By STEPHEN S. ROACH | China Daily | Updated: 2016-11-01 08:00

Without China, the world will be in recession

A worker operates a cotton spinning machine at a textile mill in Jiujiang, East China's Jiangxi province.[Photo/Xinhua]

Is the Chinese economy about to implode? With its debt overhangs and property bubbles, its non-performing State-owned enterprises and struggling banks, China is increasingly portrayed as the next disaster in a crisis-prone world.

Such fears are overblown, for China has the strategy, wherewithal and commitment to achieve a dramatic structural transformation into a services-led consumer society.

But 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 the shaky global economy. It's worth considering this thought experiment.

For starters, without China, the world economy would already be in recession. China's growth rate this year appears set to hit 6.7 percent-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 percent of world GDP (measured on a purchasing-power-parity basis). A 6.7 percent increase in China's 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 percent estimate for world GDP growth in 2016, dragging it down to 1.9 percent-well below the 2.5 percent threshold commonly associated with global recessions.

Apart from the direct effect of a world without China, there are also cross-border linkages with other major economies.

The so-called resource economies-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 percent of world GDP. Contrary to the popular belief that they have diversified economic structures that are not overly dependent on Chinese commodity demand, currency markets say otherwise: whenever China's growth expectations are revised-upward or downward-their exchange rates move in tandem. The IMF projects these five economies will contract by a combined 0.7 percent 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.

The same would be the case for China's Asian trading partners-most of which remain export-dependent economies, with the Chinese market their largest source of external demand. These economies include Indonesia, the Philippines, Thailand, as well as the more developed economies of Japan, the Republic of Korea and Taiwan. Collectively, the six economies make up another 11 percent of world GDP. A China implosion could easily knock at least 1 percentage point off their combined growth rate.

The US is also a case in point. China is the US' third-largest and most rapidly growing export market. In a China-implosion scenario, that export demand would all but dry up-knocking about 0.2-0.3 percentage points off an already subpar US economic growth of about 1.6 percent in 2016.

Finally, there is Europe. Growth in Germany, long the engine of an otherwise sclerotic Continental economy, remains heavily dependent on exports. That is due increasingly to the importance of China-now Germany's third-largest export market. In a China implosion scenario, German economic growth could also be significantly lower, dragging down the rest of a German-led Europe.

Interestingly, in its just-released October update of the World Economic Outlook, the IMF devotes an entire chapter to what it calls a China spillover analysis-a model-based assessment of the global impacts of a China slowdown. Consistent with the arguments above, the IMF focuses on linkages to commodity exporters, Asian exporters, and what it calls "systemic advanced economies" (Germany, Japan and the US) that would be most exposed to a Chinese downturn. By the IMF's reckoning, the impact on Asia would be the largest, followed closely by the resource economies.

The IMF research suggests China's global spillovers would add about another 25 percent to the direct effects of China's growth shortfall. It means that if China's economic growth vanished into thin air, in accordance with our thought experiment, the sum of the direct effects (1.2 percentage points of global growth) and indirect spillovers (roughly another 0.3 percentage points) would essentially halve the current baseline estimate of 2016 global growth, from 3.1 percent to 1.6 percent.

While I am hardly upbeat about prospects for the global economy, I think the world faces far bigger problems than a major meltdown in China. Yet I would be the first to concede that a post-crisis world economy without Chinese growth would be in grave difficulty. China bears need to be careful what they wish for.

The author, a faculty member at Yale University and a former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

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