The argument about when or whether China will overtake the United States to become the world's biggest economy is moribund. China is already the most “central” trader in the global economy, and its ability to influence events in dozens of nations far exceeds that of any other country, according to the International Monetary Fund.
This means the world could catch a nasty cold if China's growth falters, or if it fails to efficiently manage its economic expansion and a myriad of fiscal and other structural problems it faces in the near future. The IMF made the observation in its Spillover Report on China issued today. The name says it all: The Spillover Report examines the potential effects of disruptions in any of the five major trading regions (US, the Euro area, China, Japan, and the United Kingdom) on global economic activities.
Obviously, China is now positioned at a junction where its actions could significantly hurt trading partners. And yet, the overall effect of China's integration into the world economy has so far been positive. The world still stands to benefit from China's continued role. However, the Chinese government must carefully chart a path forward for the country; otherwise, its economic evolution and many of the changes being considered now will jeopardize the fiscal health of its trading partners. The IMF outlined these challenges as well as opportunities in the Spillover Report. Here are some highlights culled from the report:
- China ascendant:
- More than the world's manufacturing Mecca:
- Can China keep up this fast growth pace?
- Currency risks:
- Commodity hog and price inflator:
- Asset buying binge ahead?
China is now the first or second largest trading partner of 78 countries with 55 percent of global GDP (versus just 13 countries with 15 percent of global GDP in 2000). From a network perspective, China is now the world’s most “central” trader, with the most sizable connections to other major traders. This means that China can transmit real shocks widely, whether these originate domestically or elsewhere.
The caricature of China as merely a cog in the global supply chain — wherein imported inputs and exported processed goods respond passively to final demand in the G7– is changing. This means China's capacity to originate shocks has risen. China’s export-oriented growth model has resulted in a large expansion of China’s trade and a rapid move up the value-added chain. This has had significant implications for the global supply chain: China’s reliance on processing trade, while large, is on a declining trend.
The sustainability of China’s export-oriented growth model has been questioned — most importantly, in China itself. Indeed, the Chinese authorities recognize the need for economic rebalancing, with greater reliance on consumption, and this is official policy under the 12th Five Year Plan. The key issue for the rest of the world would be its timing, pace and spillover effects.
While many acknowledged that China’s growth had brought benefits, including lower costs and an imperative for firms to raise productivity, some saw an undervalued currency as having displaced employment.
Many counterparts cited China’s role in pulling up commodity prices — a plus for commodity exporters but not for the rest. China has become a dominant importer across a range of commodities. In metals, per capita intensity now rivals that in advanced economies, rising from less than 15 percent of the level of advanced economies in 2000 to almost 90 percent in 2009. Thus, the spillover to world commodity prices is now significant.
The channels of China’s influence on global asset prices are complex. On one hand, that influence is greatly constrained by China’s relatively closed capital account. On the other, the sheer size of China’s savings (the highest in the world in dollar terms), its rising foreign currency reserves (also the largest), and the composition of those reserves, should all affect asset prices.
It's easy to review this Spillover Report and regard it simply as another one of those interesting but barely useful economic analyses. That would be a mistake. Even China's government welcomed the review and is reportedly taking its recommendations seriously. Forward-looking high-tech executives should take a closer look and consider this: The potential outcomes of the scenarios discussed are not improbable, and the future in which they could occur is discomfortingly close.