That will determine rate of global growth
With China’s exports growth slowing to 11.3% in June according to data released on Tuesday from 15.3% in May and June import growth halving to 6.3%, the big question is whether China will have a soft landing or a hard one. HSBC PMI for China has fallen for the eighth consecutive month to a contractionary 48.2 in June; in terms of the OECD Composite Leading Indicators (CLI), China fell from 99.4 in April to 99.2 in May (the last time China was at trend, or at 100, was in November 2011 when the index was 100.1)—China’s quarterly GDP growth has slowed from 2.2% in Q1 2011 to 1.8% in Q1 2012.
While most are looking at the likely slowing in the US and the continuing recessionary conditions in Europe—and rightly so given their absolute GDP levels—the country to really watch is China in terms of its impact on overall global GDP growth. In 2010, China’s GDP rose $0.94 trillion to the US’s $0.59 trillion—so China contributed 17.7% of the $5.31 trillion rise in global GDP that year, and the US a lower 11%. In 2011, according to the IMF’s database, while global GDP grew $6.59 trillion, China’s GDP grew $1.37 trillion and US GDP $0.56 trillion—that is, while China’s contribution to global GDP growth rose to 20.8%, the US’s shrank to 8.5%. Another way to look at what happens to global GDP growth is to look at some alternative scenarios. If US growth rises to an improbable 3% in 2012, this will give $452.7 billion more to the world economy while, if China were to grow at 10%, this would give $799 billion—at 8% growth, China’s contribution will be a lower $479.4 billion. A recent article by Ruchir Sharma, head of Morgan Stanley’s emerging markets division, “10 reasons to believe in China slowdown story,” talks of a 6.5% Chinese growth over the next 5-10 years. A ‘middle-income deceleration’ as opposed to the widely expected ‘middle-income trap’ is, Sharma says, the best-case scenario for China—Sharma cites China’s running out of labour and rising wages, the invisible debt problem and the real estate bubble, among others as reasons for this.
When the IMF comes out with its revised growth estimates on Monday, the real figure to watch will be its estimates for what happens to Chinese growth—after lowering 2012 growth estimates from 9.5% in its September 2011 forecast to 8.2% in its January 2012 forecast, the IMF stuck to this in April. The IMF’s 2013 forecast for China, similarly, has been rock-steady at 8.8% in both April as well as January.