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On yer bike: The new China cycle

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16 September 2010 09:38

Back in February, I had a post that tried to think about what a world economy with a greater role for China might look like. This piece by Geoff Dyer in the FT does something similar, using the deepening economic relationship between China and Brazil to illustrate his point. 

In a story that looks very familiar to an Australian reader, Dyer notes that, last year, China displaced the US as Brazil's largest export market and that Beijing also has a growing investment footprint in the country. For Dyer, this is evidence of 'a slow-burning but hugely important trend...China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US'.

It's certainly the case that China has proved to be an important source of economic growth in a world economy where the developed world has been hit hard by the financial crisis. But how important a driver is it'

Take the case of trade. Attention is typically lavished on China's export successes, but last year China was also the world's second largest merchandise importer, receiving a bit over US$1 trillion of imports, or about 8% of the global total. Yes, that value was down about 11% from 2008, but that still compares very favourably to a global decline of 23%, or to falls in imports values of 26% for the US, 25% for the EU and 28% for Japan.

Note, however, that in a strict accounting sense, since China runs large net trade surpluses with many trading partners, and since these surpluses have tended to grow over time, the direct impact of net exports to China on growth for many countries is negative. 

Of course, this neglects a range of other potentially important gains from trade, and neglects the non-trade channel, which includes factors such as direct investment. According to China's Ministry of Commerce, last year China was the world's fifth largest source of outward direct investment, with total flows of US$56.5 billion, or about 5% of the global total. Chinese investment was up just 1.1% on the 2008 value, but once again, that has to be set against an overall drop of about 43% in global FDI outflows. This recent IMF working paper tries to quantify some of these spillover effects. 

Another way to think about Dyer's idea of a new 'China Cycle' is as the old decoupling debate given a new lease of life. 

But didn't the GFC kill off the decoupling thesis once and for all' This nice paper from Otaviano Canuto does an interesting job of thinking about some of the issues involved. First, take a look at this chart from Canuto's paper, tracking world output growth from 1961 to 2012(F): 

Not much evidence of decoupling here, with history showing that there has long been a close correlation between economic cycles in advanced and developing economies. The GFC is just the latest example. But, Canuto asks, what about trend growth' The next chart decomposes growth into two components: trend and cycle. It suggests that, since the early 2000s, trend growth in developing countries has run at a substantially higher rate than in the developed world. In other words, cyclical coupling has been combined with structural decoupling:

Canuto's conclusion is that there is scope for this structural decoupling to persist, and hence that there is potential for developing countries to 'take on a greater role as global locomotive.'

A slightly different way to think about all this is as the erosion of some of the old distinctions between the 'core' and 'periphery'. Once upon a time, models of the world economy would often involve a developed country core and a developing country periphery, with growth impulses largely transmitted from the former to the latter. That simple distinction appears to be in the process of breaking down.

This, of course, has important implications for Australia, not least because it's not only developing countries that are going to be part of any potential China Cycle: Australia too is tied into Chinese growth (and into emerging Asian growth more broadly) via deep trade and growing investment linkages. Whether these developments are the product of a structural shift in the world economy or of a rather more temporary shift change is going to matter a lot for our future, and will help inform a wide range of policy discussions.

Photo by Flickr user dopamineharper, used under a Creative Commons license.

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