An opinion gaining popularity holds that the Chinese economy,
even the emerging economies as a whole, is decoupling from the US
economy. The theory is based on the belief that the relationship
between the Chinese economy, and the economies of emerging market
countries, with that of the US economy is no longer as close as it
was.
Judging from the current situation in and out of China, such an
opinion is actually flawed. Worse, it could create a false sense of
security.
Measured by the growth in GDP, the US economy has remained low
for years. And its GDP growth even dropped below 2 percent last
year due to the impact of the subprime crisis.
By contrast, the Chinese economy has been on a strong upward
momentum for the last decade. GDP growth in China will probably
exceed 11 percent for 2007.
The contrast seems to be a supporting point for the decoupling
theory, but it does not hold water.
The low growth in the US GDP is actually caused by shrinkage in
its domestic investments. But domestic consumption, another
economic engine has not slowed.
US consumption has and is likely to keep acting as a decisive
factor in Chinese exports. And that link obviously goes against the
decoupling theory.
Believers in the theory often cite the increasingly close trade
ties among the eastern Asian countries as solid proof for the
weakening connection of the region with the US economy.
But they have obviously overlooked one factor - the closer trade
ties within eastern Asia has been caused by the shifting roles of
these countries in the industrial chain.
In the past several years, especially after the Asian financial
crisis in 1997, they are more specified in their own sectors of
manufacturing according to their own competitive advantage, so they
have to develop industrial cooperation featuring frequent trade
ties.
Meanwhile, these countries do not see a significant boost in
their domestic consumption. Instead, they depend more heavily upon
demand from outside the region, especially from the markets in
Europe and the US.
This dependence brings about a huge inflow of money to the
region, which in turn, means gigantic foreign exchange reserves for
these countries.
The decoupling theory is a false one also because it does not
take into account the reality of intensifying globalization.
Every economy is now an integrated part of the global economy.
On one hand, this globalization garners more trade and on the
other, it also faces more risks and uncertainties.
It is unrealistic to embrace globalization and enjoy its
benefits, and expect no potential threats.
In the face of the decoupling theory and its supporters, the
decision-makers should be vigilant to the possible impacts on
Chinese exports and even development of the Chinese economy once
the US economy continues to weaken.
Consumption is gaining more weight in the US economy and it
contributes about 72 percent to its GDP.
It is not propped up by higher average income or fuller
employment, but by a robust consumption in property and cars
encouraged by low interest rates. If the subprime crisis is not
contained or even escalates, consumption, especially those made
with mortgage loans, might drop, depressing the US economy.
With net exports contributing about one-third to China's
economic growth, the country will certainly feel the effects if the
US economy rapidly slows.
Of course, it is a bit early to judge the global economy in
2008. If the measures taken by the US government and the EU
countries to curb the negative effects of the subprime crises work
well, the panic in the financial markets would be eased and the
global economy may only see a minor obstacle to its growth.
The $1.5 trillion foreign exchange reserves of China would be
very helpful in guarding against a potential financial crisis. With
sound growth in the government's income, the Chinese administrative
would also have enough leverage to switch to a proactive fiscal
policy if exports stop growing or even drops.
China is one of the biggest beneficiaries of globalization, and
it might also become a prime victim once the global economy turns
sluggish. For that reason, we must be vigilant against a false
sense of security forged by the decoupling theory.
The author is a researcher with the Institute of World Economics
and Politics under the China Academy of Social Sciences.
(China Daily January 11, 2008)
