I attended a very good lecture organized by the European Chamber of Commerce in China, on the topic of how a US recession and a slow down of the European economy could affect the economic development of China. Two excellent speakers, Prof Wang Jianmao (Professor at CEIBS) and Andy Rothman (China Macro Strategist at CLSA), described how China is rapidly moving from a foreign direct investment (FDI) and export dependant country to a country driven by its own domestic economy. At the same time, China would suffer less from export drop then areas such as Mexico for US and Eastern Europe for Western Europe.
Question 1: Will China economic growth drastically drop because of a US recession and a European slow down?
Both speakers’ conclusion is negative. China will slow down a little but will remain a very strong economy even in the case of a deep and long recession in the US.
Prof Wang Jianmao presented several scenarios. Even the worse of all (deep and long recession in the US, trade war between China and the West) led to a GDP growth of at least 6% and the evolution of China as a strong regional economy. This would be much lower than the 2007 growth rate of 11.4%%, but still comfortable to sustain the development of the country.
Andy Rothman presented a scenario where the Chinese GDP growth would slow down by about 1% from his current estimation of the 2007 GDP growth of 9-10% down to 8-9% in 2008.
The main fact is that the contribution to GDP growth from net export is increasingly low – in 2007, it dropped from 25% down to 4% between the first quarter and the last quarter of 2007. In addition, China’s domestic economic growth is fueled by very strong factors:
- GDP per capita is still 5 times lower then the one of Japan or Korea when their growth slowed down.
- Growth in China central and western provinces is at least 4% higher than in the coastal provinces, which shows that economic development spreads out.
- Population aging is not as much a problem as normally suggested: in practice there is 1.5 child per family and the revenues generated by the single person (and supporting 2 parents) is already 8 times larger than what it was in the 1980s.
From a Western buyer’s point of view, this is doubtlessly good news. There is a low risk of seeing a wave of suppliers facing very difficult market conditions and ending in tough financial situation and possibly bankruptcy. The current pace of development of the good suppliers you are working with has no reason to change.
Question 2: What will happen to export from China when US comes in recession and Europe slows down?
Andy Rothman is convinced that the export from China will be much less impacted than export from other low cost countries. He bases his opinion on the following facts:
- China export mix is already adjusting. In 2007, the US was replaced by Europe as the biggest destination of export. In addition, Latin America, Middle East and Africa (resource rich and booming economies) have already replaced Japan as the third destination. Slow down in US import will be replaced by those from growing economies.
- China is the manufacturing source of last resort. When the Asia crisis hit in 2001, China exports continued to grow, while all other countries (including Japan) saw 10%+ export drops. In 2007, import growth into the US has already dropped by 50%, but at the same time import from China has only dropped by 30%. In contrast, import growth from Mexico has dropped by more than 50%.
- Inflation in China is real but not as large as suggested and only partially exported. The current inflation is totally food price driven: CPI was up 7% in January, but non-food CPI was up only 1.5%. This is a spike due to a drop of meat supply. Andy Rothman expects the supply to come back to normal by mid year. In addition, in a large survey, 80% of Chinese exporters indicated that they wanted to increase prices, but only by around 5%.
From a Western buyer’s point of view, this is also reassuring. For European and Latin America, Middle East, Africa, it is also very good to ear that many other buyer follow the same trend as you and that China is gearing to serve you.