2012: China’s new position in world economy

2011-12-27 (China Military News cited from chinadaily.com.cn and by John Ross) — In 2012 the world economy will continue to struggle with the international financial crisis. There will be recession in Europe, world trade was already declining in September and October, and international commodity prices are falling sharply – a sensitive indicator of the state of the world economy. The only unknown is the severity of the slowdown – in particular, will the US be pulled into recession or merely continue to grow slowly, and by how much will the large developing economies such as Brazil, India and Russia decelerate? China’s premier Wen Jiabao predicted that next year’s international economic situation would be “complicated and tough.”

Entering a difficult situation, it is necessary to aim for the greatest possible accuracy in assessing the position of China in the global economy – this affects both the rest of the world and China. Frequently repeated statistics, such as that China’s is the world’s second largest economy, are insufficiently accurate to suffice for this. For reasons indicated below they underestimate the role of China in the world economy’s development and are not fine grained enough to accurately judge economic policy. Analysis shows China will play a pivotal role in the world economy in 2012 – Goldman Sachs’s Jim O’ Neill, who coined the term BRIC, said in the Financial Times: “While the financial and business world continue to hang on every twist and turn in eurozone politics, I think the biggest issue for the world in 2012 will be…China.”

The first reason for this is that China’s high growth rate results in its contribution to world economic expansion being much greater than its percentage of world GDP. In 2007, the last year before the international financial crisis, China accounted for only 6.3 percent of world GDP. But in the following three years the world economy expanded by $7.2 trillion while China’s economy grew by $2.4 trillion – i.e. China accounted for 33 percent of world growth. In contrast, in 2007 the US accounted for 25.1 percent of world GDP, but in the next three years the US economy grew by only $0.6 trillion. Therefore in the last three years China’s economy contributed four times as much to global growth as the US. The EU, to make a comparison, contracted by $0.7 trillion during the same period.

The second key factor is China’s financial role. The key feature of this is not, as is sometimes supposed, China’s $3 trillion foreign exchange reserves. These have been accumulated over a significant period and, because a large part is an emergency reserve, only a small amount can be utilized at any point. The key element is the finance China generates each year for investment – i.e. its total company, household and government saving. In 2007 US total finance generated for investment was $2 trillion and China’s was $1.8 trillion – that is, the US was slightly ahead of China. By 2010, under the impact of their economies, different responses to the crisis, total finance available for investment in the US was $1.6 trillion and in China $3.1 trillion – i.e. China’s finance available for investment is now almost twice that in the US, a dramatic change in three years.

Turning to international trade, US imports have still not regained pre-financial crisis levels. Taking a three-month average, to avoid distortion by purely short-term fluctuations, up to the latest available data, for October, US imports were an annualized $17 billion lower than the pre-financial crisis peak level in July 2008. Therefore in the last three years the US market for exports has contracted. In contrast, compared to the pre-crisis peak in July 2008, China’s imports from other countries have increased by an annualized $575 billion. China therefore now plays a much greater role as a market for increases in exports than the US.

4 comments

  1. China is the worlds largest economy. But I dont quite see why China should assist in pulling others out in a world filled with zero sum gains.

  2. China is the second largest economy…Get your facts straight before you post!

  3. I think he meant China is the worlds largest [ growing ] economy.

  4. Great article but it didn\’t have everything-I didn\’t find the ktihcen sink!

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