Feb 11 2008

Could a US recession be good for China?

FT.com / Asia-Pacific / China – China ‘on course for growth slowdown

Among many Americans today there seems to be a negative opinion towards China. It is popular to bash China (remember Red Storm Rising!?) and blame the country’s cheap labor and booming export sector for the loss of American jobs. Undeniably, however, the US depends on China as a source of cheap imports, which help keep the overall price level for American households down and relieves inflationary pressures in the face of a weakening dollar.

Likewise, China depends on the US for its own economic health. In China around 40% of GDP comes from exports (vs. less than 10% in the US); of the $1.22 trillion of exports from China last year, 21% went to the United States (source: CIA World Factbook). This means that something like 10% of China’s national income comes from US households’ demand for Chinese products. Significant, to say the least.

Surely a recession in the US, accompanied by a slowdown in consumption, would have negative effects on the Chinese economy, right? Well, that depends on what is going on in the Chinese economy. Let’s think about this some more.

Most economists would agree that economic growth is a good thing. More output and income should mean that on average, the people of a country become better off, as they get richer and have more stuff to make their lives comfortable. But too much economic growth may be a bad thing. In 2007 China’s economy grew by 11.4% “the fifth consecutive year in which output (rose) at double-digit rates”. The engine of this economic growth has to a large extent been US demand for Chinese products. With this demand expected to decline as the US enters a recession, growth in China is expected to slow.

The World Bank has cut its forecast for Chinese economic growth this year to 9.6 per cent – which would be nearly 2 percentage points lower than last year’s outcome – adding to a firming consensus that the economy wil slow because of decelerating exports and a weakening global outlook.

Notice the World Bank is not saying that China will slide into a recession along with the US, rather its growth rate will decrease slightly. This is not the economy screaching to a hault, this is China’s economy going from growing at warp speed to slightly below warp speed.

What makes the Bank so sure that China can maintain a near double digit rate of growth even as the world’s economy slows?

The bank says in its quarterly report on the Chinese economy, however, that China is well-placed to manage the knock-on effects of any global slowdown because of a strong domestic economy…

In fact, the US recession and the global slowdown may actually help the Chinese economy. Over the last year the gains of incredibly rapid growth have been mitigated somewhat by the erosive power of inflation, which skyrocketed to over 7% in late 2007. China’s inflation was mainly demand-pull in nature, meaning that aggregate demand had accellerated more rapidly than aggregate supply. Much of the increase in aggregate demand over the last few years was from the voracious US consumers who couldn’t get enough of those cheap Chinese imports (thanks in part to the over 3,000 Wal-Mart stores now open in the US!).

Demand-pull inflation is sometimes described as “too much money chasing too few goods”. With 40% of its income coming from abroad, a decrease in demand for exports resulting from falling incomes abroad could releive some of the pressure on prices in China.

Indeed, the bank says a weaker global economy may dovetail with the aims of Chinese policymakers by relieving inflation pressures, their paramount concern, and restraining the contentious trade surplus.

Great, so a global economic slowdown may actually cause a healthy decrease in the insane rates of growth here in China. But what if the US recession triggers a longer-term slowdown in world income and output? Should China worry about other foreigners demanding fewer exports? Maybe, but things appear far from foreboding here in the Middle Kingdom, as domestic consumption continues to grow as a component of GDP:

“The slowdown in the global economy should affect China’s exports and investment in the tradable sector,” said David Dollar, the World Bank’s country director for China.

“However, the momentum of domestic demand should remain robust and a modest global slowdown could contribute to rebalancing of the economy.”

Recession seems to be the least of worries here in China. However, while the future looks bright for now, it should not be forgotten that every period of expansion in every modern market economy in the world has ultimately reached a peak, and then led to a contraction. Ahh, the inescapable destiny of the business cycle certainly awaits China at some point, of that there is no doubt.

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

27 responses so far

27 Responses to “Could a US recession be good for China?”

  1. Margaret Liuon 12 Feb 2008 at 3:42 pm

    Great, now China's crash won't be as painful. Maybe because of this decrease, the Chinese government can learn, and gain time to prepare for its downfall and try to dampen whatever negative effects that will bring. If China had a recession, what would happen to the world? Would we continue to be as we were before China's big economic boom? Or would we join China in its inevitable spiral down?

  2. emilyyehon 12 Feb 2008 at 6:23 pm

    I think that the US recession may also have less impact on the Chinese economy because of China's own large domestic market. While economic growth may be slowing globally, China has its huge population to turn to in order to continue its growth. Perhaps the percentage of exports lost to US recession can be made up in domestic growth.

  3. Alice Suon 12 Feb 2008 at 6:33 pm

    Margaret brings up an interesting point. We can see from this article how China and other nations of the world are inevitably intertwined in their economies and how their recession and growth periods must affect each other. However, since so many nations are dependent on exporting cheap goods on China, what WOULD happen if China suddenly plummeted into an economic recession? We probably all agree with the title of this post- a U.S. recession COULD be good for China. But could a Chinese recession be good for anyone? Maybe other lesser developed countries would benefit as they became substitutes for China as a source of cheap imports…

  4. judychenon 12 Feb 2008 at 10:48 pm

    I don't think the recession in US economy would affect China too much. China government has control on its economy even though China government cannot completely control it, but at least China's economy would not be resulted as bad as other countries from the recession in US economy.

  5. mina.songon 13 Feb 2008 at 1:25 am

    I agree with Emily, I heard that one of the reason that Japanese company Sony is able to survive although whole world don't buy its product because Japan has enough its domestic consumers to keep the company work. If Japan is able to do that, I think China must can do it. Although America's recession is serious it won't affect China that much I think!!hehe

  6. andyxuon 13 Feb 2008 at 9:08 am

    Quickly after glancing at the title, I have already come up with a response:

    In a state of globalization with improved communications and logistics, economies of the world run as a single unit.

    Therefore, obviously, the US recession would impact China negatively. Of course, the discussion is to what degree and how will China respond.

  7. Kristie Chungon 13 Feb 2008 at 9:50 am

    I think a U.S. recession will definitely have some impact on China's economy. It just depends on the degree that it does. Although the domestic consumption is growing and possibly counters the decrease in foreign demand for its exports, like the article said, an economy's growth and peak is always followed by a recession.

  8. Howard Jingon 13 Feb 2008 at 10:50 am

    Eventually China's economy will start to slow down, but I think that even if the demand for exports decreases, China can then eventually begin focusing on marketing products to its own population. Since many foreign companies are investing in China as a largely untapped market, Chinese companies can eventually start doing the same and focusing on increasing the standard of living in rural areas which have been previously largely ignored.

  9. Annie Sungon 13 Feb 2008 at 6:20 pm

    Globalization, like Andy Xu mentioned above, have linked economies around the world together. With China relying heavily on exports, especially to the US, a recession in the US would affect China. Whether it will bring China down into recession as well, or merely bring it below "warp speed", only time will tell. But as the article says, it is possible for a US recession to just slow down China's growth, instead of a complete recession.

  10. Drew Venkatramanon 13 Feb 2008 at 8:17 pm

    wow nice comments guys! Its interesting to see how globalization has linked the economies together especially those of the United States and China. Perhaps a recession for the United States will be good for china, and maybe It will allow for Chinese economy to grow but I still believe that most of this is speculation

  11. Angel Liuon 13 Feb 2008 at 9:00 pm

    I think that right now China's economy is experiencing slow growth. During Chinese New Year, if you go downtown or just nearby hong mei road, you might notice that many shops have a big rent sign on their shop window. Usually, around this time of the year, it's the best shopping season. The fact that Chinese are conserving their red envelope allowance indicates that China's booming economy is slowing down.

  12. Trevor Sunon 13 Feb 2008 at 9:02 pm

    I agree that China's economy will be negatively impacted if the US goes into a recession. Like others have mentioned, everyones economy is linked and therefore impacted by one another. How much they are impacted I wouldn't know.

  13. Jo Loon 13 Feb 2008 at 9:02 pm

    Without reading the article, and just looking at the title, one can easily state that a recession in the US will negatively affect China in the short run. Still though because China is growing at such a quick pace, the recession will not bring the economy to a stop but will decrease the rate in which the CHinese economy is growing. With or without the recession China will still have a robust economy.

  14. Mondon 13 Feb 2008 at 9:33 pm

    A recession in the US could be beneficial for China. It would slow down China's amazing economic growth rate, to relieve some stress and damages that has been caused by this high double digit growth rate. The most evident effect of this high growth rate would be increased production of goods, which also yields more pollution. If the growth rate slowed down a bit, the government could have more resources and time and attention to spare to deal with these environmental issues.

  15. Michael Dailyon 13 Feb 2008 at 9:43 pm

    Although the US recession could help the Chinese economy, it has already been shown to slow growth. As the article mentioned China won't suffer too greatly because of its strong domestic market but exports are still a big part of Chinese economic profits. And I understand China will at some point reach a recession, but I think that will take a lot longer to happen because as the US recession shows, China's economy is still expanding significantly.

  16. robertwangon 13 Feb 2008 at 10:14 pm

    I think a lot of the effects on China's economy will have to depend the timing. We all know China's economy is going to hit the inevitable recession, but if China passes through it's peak while American is in it's expansion period, wouldn't America's demand for Chinese goods increase again, thus decreasing the effect of the recession on China (possibly even decreasing the length of the recession?).

  17. Jessica C.on 13 Feb 2008 at 10:40 pm

    As I've lived in China for almost 15 years now, I've noticed a significant change: Chinese people are getting richer!! Of course, the economy is booming and all is going well…so far. A recession in America would probably affect almost all nations negatively because it is one of the world's leading economies right now. China's economy still has a lot of potential for growth, and until it reaches that peak, it will continue to grow.

  18. Kai Lin Fuon 14 Feb 2008 at 12:29 am

    Yes, a U.S. recession would definitely effect the Chinese economy since it is heavily depended on its exports. However, a recession affects different goods,which means its nondurable consumer products are insulated from it, cushioning the blow.

  19. Hansen Guon 14 Feb 2008 at 1:07 am

    "This means that something like 10% of China’s national income comes from US households’ demand for Chinese products." 10% is no small number. There will definitely be a leash placed on China's growth. I do not think the economy can overly benefit from the recession of the US economy. As aforementioned, the global market is as the name suggests intertwined. The Chinese economy, albeit just 2 points predicted slower growth, will feel the tug.

  20. Cassy Changon 14 Feb 2008 at 1:27 am

    I think it's bad for people in China who are exporting goods to the US, since if they get paid in US dollars, they are losing money due to USD's depreciating value.

  21. jenniferchoion 14 Feb 2008 at 6:39 am

    I think it is good that China wouldn't have to suffer too much from US recession. Even considering the large population here in China, I think it is suprising that China's domestic demand can support US recession since a large portion of China's GDP comes from exports.

  22. Caleb Liaoon 14 Feb 2008 at 12:06 pm

    I think that the U.S. Recession will not be too detrimental for the Chinese economy because other nations with large economies are too, heavily invested in Chinese markets. For example, Germany has many investments in China. So although there will be some dip in the economy, I find that the recession in the U.S. may not hurt China too much, and in the long run may strengthen because of the opened road to grow while one of the largest economies is shrinking, in ways that are not tied to the U.S. economy.

  23. Chris Seahon 14 Feb 2008 at 2:12 pm

    This is an interesting scenario. Historically, the Chinese economy has been extremely durable: case in point, the 1997 Asian Financial Crisis. If you look at any of the widely available graphs on the matter, the Chinese economy's growth was only slightly dented. This is nevertheless a negative effect and China's economy will nevertheless be affected as such. On the other hand, this slide in the US's performance bodes will for those here in China who want to buy American-made goods since these events aren't exactly helping the dollar.

  24. Howard Linon 14 Feb 2008 at 9:43 pm

    Speaking of the business cycle, its kind of scary to think that China's economy will decline at some point in the future…

    Where will the next land be for the business men to explore? Perhaps India, or Africa.

  25. Jonathan Lauon 17 Feb 2008 at 5:59 pm

    I am pretty sure a recession in America would have a negative effect on China's economy. Since China relies so much on America for its exports, a recession would surely decrease the amount America imported from China. In addition, as stated in the article, about 10% of China's national income comes from US household's demand for good, so China would definitely feel the effects of a recession in America.

  26. julie.linon 17 Feb 2008 at 10:22 pm

    yes i agree with jon lau that it would have a negative effect on china's economy, since about i dont know how many percent of chinese goods are exported to the us and they build up to be a huge factor of americas market

  27. Fabian de Voson 20 Apr 2010 at 9:33 pm

    What we see here is that China grows even during world recession. What this could mean for China is that at some point they will burst due to all the exports they have. If areas like The Americas or Europe stop importing their goods their economy will burst since they rely on the exports and that is why they grow so rapidly.