How Much Should We Worry About A China Shock? Suppose that those of us now worried that China’s Ponzi bicycle is hitting a brick wall (or, as some readers have suggested, a BRIC wall) are right. How much should the rest of the world worry, and why? I’d group this under three headings: 1. “Mechanical” linkages via exports, which are surprisingly small. 2. Commodity prices, which could be a bigger deal. 3. Politics and international stability, which involves some serious risks. So, on the first: this is what many people immediately think of. China’s economy stumbles; China therefore buys less from the rest of the world; and the result is a global slump. Or, maybe not so much. Some quick, rough, but I think useful math: In 2011, the combined GDP of all the world’s economies not including China was slightly over $60 trillion. Meanwhile, Chinese imports of goods and services were about $2 trillion, or around 3 percent of the rest of the world’s GDP. Now suppose that China has a slowdown of 5 percent relative to trend. Imports would fall more than this; typical estimates of the “income elasticity” of imports (the percentage change from a 1 percent change in GDP, other things equal) are around 2. So we could be looking at a 10 percent fall in Chinese imports — an adverse shock to the rest of the world of one-tenth of 3 percent,or 0.3 percent of GDP. Not nothing, but not catastophic. And even this is arguably an exaggeration, because a significant part of China’s imports are components for its exports,and don’t depend on Chinese domestic demand. As I said, then, the mechanical links through trade flows are relatively small, although they could bulk much larger for some of China’s neighbors (but would be smaller for the United States). Commodity prices are a potentially bigger story. China is a major consumer of raw materials — for example, about 11 percent of world oil consumption. And because the supply and demand of commodities tend to be relatively unresponsive to prices in the short run, a sharp drop in Chinese demand could lead to sharp falls in commodity prices. So the Ponzi bicycle shock could be a bigger deal for countries that sell raw materials, whether they sell to China or not, than it is to China exporters. Finally, politics and international relations. I am obviously no kind of expert here. But it’s obvious, first, that China’s political regime is remarkable, even given the annals of history, for the hypocrisy of its position: officially it’s building the socialist future,in practice it’s presiding over a crony capitalist Gilded Age. Where, then, does the regime’s legitimacy come from? Mainly from economic success. Let that success falter,and then what? And if you really want to get nervous, think about what cynical governments trying to distract their populace from domestic failures have often done in the past. Saber-rattling over some islands somewhere, anyone? No particular bottom line here, except that you probably want to focus much more on the indirect effects than on the direct export multiplier. - Paul Krugman
Posted on: Sun, 21 Jul 2013 16:08:17 +0000