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China’s ark is not big enough for the world

No question about it, the global economic situation is dire. The major economic entities, the United States and the European Union, are in the throes of self-inflicted, but apparently insoluble, problems as they lurch their way to stagnation and possibly global depression.

In the US, bizarre political configurations continue to prevent a real recovery. The Obama administration blew its chances in the first two years by failing to put in place a fiscal package that would create more jobs and generate positive multiplier effects in a sustainable way.

But now that it finally seems to have realised the necessity for at least some such measures, it is being impeded by the intransigence of Republican elected representatives, fuelled by Tea Party elements who demand a smaller state at any cost. So now the gaze is turned longingly to the east, in the hope that China and the rest of developing Asia will rise up to save the world economy.

This hope is being expressed in all sorts of ways. An early belief was that, since the global economy is now ‘multi-polar”, a decline in Europe and the US can be more than offset by expansion in China, India, Brazil and similar emerging markets. In particular, China, which is now the largest exporter in the world, is ­supposed to take up the slack and create an alternative growth engine for the world.

This is still mostly wishful thinking because, however much world economic power equations may have changed, they have still not changed enough to create that kind of possibility. Being an engine of growth requires generating import demand that can be met by the rest of the world. At present the US accounts for about 13% of global imports, and the EU for about 17%.

China, by contrast, provides only 9% of global import demand — and well above half of that is of raw materials and intermediate goods required for processing into exports.

Suppose imports from the EU and US together were to decline by, say, about 5% during the coming year — which is an increasingly likely possibility. Then Chinese imports would have to increase by nearly 15% simply to make up for that decline.

If we recognise that Chinese exports will also be affected by that decline, since the US and EU together account for 40% of these exports, then the required increase in other Chinese imports would be more of the order of between 20% and 25%. And this would only ensure the same level of world trade values, with no increase. This notion of delinking is no longer viable, given the strong and myriad connections that already bind major economies. But then maybe this deeper integration can be put to good account in other ways?

Financial saviour
Another role that is proposed for China in the continuing drama is that of financial saviour, buying up the sovereign bonds of peripheral European countries like Greece, Spain and Italy, and thereby ­reducing their financial exposure and preventing their default. Indeed, China’s sovereign wealth fund has already bought into such bonds.

Suppose China were to expend real firepower by spending a greater proportion of its reserves on buying these bonds. This might create ­temporary relief in the markets but it would do little other than delay the inevitable denouement. Recall that China bought shares of several ailing US banks in 2008, to little eventual effect. Chinese investment in European bonds is simply another straw being grasped at by politicians unwilling to face reality and the real changes in strategy that are required.

In any case, expecting China to save the world is also based on an unrealistic assessment of the state of the Chinese economy. The global slowdown is bringing out more clearly that the investment and export-led model that powered China’s growth for three decades is already out of date.

In fact, in the wake of the global crisis, the Chinese authorities sought to change this through a recovery led by a fiscal stimulus based on infrastructure investment and monetary stimulus based on easy credit, especially for housing.

The consequent housing bubble is now on the verge of being pricked, and a massive expansion of shadow banking means the Chinese financial system is more fragile and beyond the control of the state than at any time in the last half-century. A slowdown in exports in this context could have all sorts of undesirable effects on China’s economy, however strong it may seem now.

The solutions have to come from globally co-ordinated Keynesian policies for expansion, not external stimuli. So do not look to the Orient for gifts at this point. —

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Jayati Ghosh
Jayati Ghosh
Jayati Ghosh is one of the world's leading economists. She is professor of economics at Jawaharlal Nehru university, New Delhi, and the executive secretary of International Development Economics Associates (Ideas). She is a regular columnist for several Indian journals and newspapers, a member of the National Knowledge Commission advising the prime minister of India, and is closely involved with a range of progressive organisations and social movements. She is co-recipient of the International Labour Organisation's 2010 Decent Work Research prize

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