What drives China’s economy?

The Economist on China the “export juggernaut”:

So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia—Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half’s slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China’s appetite for raw materials for a long time to come.

Trade within East Asia has grown even faster than the region’s trade with the rest of the world, suggesting deeper specialisation and integration. But China’s impetus has also profoundly altered the course of trade flows in Asia. As a paper last year by the Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) in Paris describes, the China effect over the past decade or more has been the driving force behind a shift in Japan from exporting finished goods to Europe and North America towards exporting parts and components for assembly on the mainland. In turn, Japan now imports finished goods (such as office machines and computers) from China where previously they came from America and Europe.

I think this concluding claim may be subject to dispute:

Though very open to trade, China’s economy, like America’s, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports.

For example, Nick Lardy argues:

China’s external surplus continues to balloon and, short of a US recession, seems likely to expand further in 2007. Household consumption as a share of GDP continued to decline in the first half of 2006. Despite much lip service to increasing budget outlays on social services, little evidence of a fundamental shift in government spending has emerged. So Chinese households’ precautionary saving persists. There is little evidence of a more flexible exchange rate and increased independence of monetary policy that would allow higher domestic interest rates. These and other factors suggest that China’s transition toward more consumption-driven growth is likely to be substantially delayed.

UPDATE: Brad Setser has more along that line of thought.

1 thought on “What drives China’s economy?

  1. brad setser

    well, in some sense China’s economy is driven fundamentally by its own domestic demand. its 10% growth breaks down to something like 7% from domestic demand (more investment than consumption) and 3% from net exports. But that is in a sense meaningless — the stunning thing is that net exports contributed 3% to growth (give or take) for two straight years, pushing up China’s surplus. a comparable contribution in the US in 07/08 (not going to happen) would eliminate the trade deficit. on an absolute scale, China clearly has been drawing on the world’s demand, not adding to it — its “supply” keeps increasing faster than its “demand”, ergo rising net exports.

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