Is China going to pull the rest of the world out of the financial crisis? Or will the world have to depend on the revival of American consumers' desire to buy endlessly once more? These are the questions being debated in the financial news pages all over the world - but something is missing. In Hong Kong, we understand very well how the inflow of investment to China since the 1980s helped to turn the country into the world's export production centre. The Pearl River Delta, where Hong Kong has invested very heavily, is one of the nation's most productive areas and the export-led growth strategy has paid off handsomely for many industries. Trade accounts for more than 40 per cent of China's gross domestic product.
However, we now know that this strategy is vulnerable to external fluctuations. Today, China is affected by the global downturn as consumers in the US and Europe buy less and save more. Hong Kong manufacturers have had to cut back production, with some even closing factories, while others look for new ways to remain viable and competitive. There have been massive lay-offs across the border as a result and this is one of the stickiest challenges for the central government. Beijing is also affected by the financial meltdown in America, since most of its foreign exchange reserves are in US-dollar-denominated papers.
Nevertheless, China is still growing when many other economies are in recession. Investment is still flowing in when it has dried up for others. Beijing's trade surpluses with the major importing countries are shrinking but its external reserves remain massive: more than US$2 trillion. For these reasons, it is seen as the shining hope to pull the world out of the economic doldrums. The expectation now seems to be that it will buy from the rest of the world.
What does China import? It is a huge buyer of raw materials, including energy (mainly oil and gas), intermediate products, and parts and components, much of which are used in export production. But its imports of consumer products are relatively small. Although mainland tourists are hearty shoppers of foreign brands when they travel abroad, giving the impression they too are on the way to becoming champion consumers, the mainland mostly depends on domestic production for its own consumption.
In the US and Europe, the proportion of consumer products imported from developing nations is significant, especially from China. Thus, even though the mainland's GDP may still grow at 7 per cent this year, that will probably not entice it to buy a lot more from the rest of the world. To a great extent, its exports dictate much of its imports, such as raw materials, parts or specialist manufacturing equipment. In any event, China's economic health is perhaps not as good as one would like it to be. Government revenues fell 2.4 per cent in the first half of the year and there may well be a fiscal deficit for the full year.
Many economists are also talking about when the US economy will recover so Americans can regain their insatiable appetite for all kinds of consumer products from the rest of the world. According to this view, the global economic crisis must end where it began - in America. As a consumer, China is not yet in a position to replace the US as the world's major economic engine, and US material consumption remains vital to the overall well-being of everyone. Consumption, and the more the better, makes the world go round.