Almost all countries that relied heavily on exports for growth have experienced large downturns. And there economies are still in the doldrums. Except one. China.
Few questions matter more. Right now, the markets believe that the expansion of Chinese demand will drive the global recovery. Or so it seems.
On the other hand, other countries that relied heavily on exports to drive their growth saw very sharp falls in output. Germany. Japan. A host of smaller economies. Few expect these economies to lead the global recovery.
In general, the crisis has led to large falls in output in countries that relied heavily on capital inflows to finance large currency account deficits (Latvia is the leading example) and in countries that relied heavily on external demand. That stands to reason. The crisis produced a very sharp fall in capital flows, which hurts all those who needed ongoing capital flows (The US is an exception, as US demand for foreign assets fell faster than foreign demand for US assets, so net private flows to the US actually rose during the crisis) And the contraction in trade has been sharper than the contraction in output. That has hurt those who relied more on trade. The fall in Japanese industrial production - -and output – has been incredible steep. And German output has shrunk by more than say French output.
See Wolfgang Munchau.
China doesn’t fit. It is a big exporter. But it hasn’t seen the kind of contraction that other big exporters have experienced.
One possible answer is that demand for Chinese exports has fallen by less than demand for other exports. That clearly is part of the story. US imports from Japan (through March) are down over 40% y/y. US imports from China are only down 11%. But China’s exports still have fallen sharply. They were down 20% y/y in q1 2009 after being up around 20% in q3 2008. So that isn’t the whole story.
Another potential answer is that China never relied all that much on exports for its growth. That is the preferred answer of the Economist. But it doesn’t really stand up to scrutiny. Chinese exports rose from under $300 billion in 2000 (and 2001) to over $1400 billion in 2008. That is a huge increase, one that was only possible with a huge amount of investment in the export sector.
While import growth matched export growth in the early stages of China’s expansion, back in 2004 China got worried that its economy was overheating and slapped on a host of limits on domestic demand growth. From 2005 to 2008, net exports contributed over 2% a year to China’s growth.
To put it a bit differently, the contribution of net exports to China’s growth over the past four years topped the overall growth in Japan’s GDP. That isn’t a small contribution in my book.
So why isn’t China doing worse now?
The answer, I suspect, is that China – unlike many other countries that relied heavily on exports for growth – actually did have an underlying dynamic of domestic demand growth. From 2004 on, Chinese policy sought to limit domestic demand growth by limiting bank lending and running a tight fiscal policy. The loan to deposit ratio in China’s banks was quite low going into 2009, thanks to high reserve requirements and tight lending curbs. That was necessary to keep China’s economy from avoid overheating – and to keep China from experiencing a real appreciation driven by rising inflation -- even as exports contributed heavily to growth.
It also gave China an option other export-based economies didn’t have when the global economy turned down – namely to lift existing restrictions on domestic demand growth and see what happened. And that’s what China did.
Banks who previously had been kept from lending as much as they wanted were free to lend. Local governments that had been forced to scale back their investment plans were free to go ahead. State enterprises that hadn’t been able to borrow quite as much as they wanted were able to borrow on a large scale.
I initially underestimated the magnitude of China’s stimulus by focusing on the (fairly modest) change in the government’s fiscal balance. It is now clear that the majority of China’s stimulus has been off-budget: the huge increase in lending by state owned banks mattered far more than the change in the budget of the central government. The expected loss on these loans can be considered a form of fiscal stimulus.
China then was every bit as exposed to the global slump as the other export powerhouses – but it also had more capacity than most other large exporters to stimulate domestic demand.
Did the policy work? Did growth fueled by the rapid rise in domestic lending – and associated rise in investment -- offset the export downturn, allowing China to hit its growth targets?
My best guess is that the transition wasn’t quite as smooth as the official data suggests.
Manufacturing accounts for a large share of China’s economy; so if the manufacturing sector is contracting, it is hard to see how China can achieve its stated growth target.
Stephen Green of Standard Chartered (in his May 25 note) argues that there is no evidence that energy-intensive sectors of the economy have contracted (or grown) more than other sectors, undercutting one explanation for the disconnect between the power generation numbers and China’s growth numbers. He also notes that the data on industrial value-added hasn’t tracked the data on industrial production that well. The industrial production data suggested a sharper fall in activity – and a more choppy recovery than the GDP data.
That seems right to me. China’s trade data (through April) suggests that the stimulus did spur a pickup in imports (and it clearly spurred auto sales). But China’s import data also suggest a quite sharp slowdown last fall, far larger than the slump in the official data.
In other words, China didn’t spur domestic lending quickly enough to avoid the global downturn, especially as China’s real estate sector was clearly slowing even before the Lehman crisis.