China locomotive still relies on US economy for traction
Everybody is desperately hoping that the growing demand of Chinese consumers for goods and services can emerge as a new locomotive for the global economy.
Policymakers in the Western world hope so, because they see greater domestic consumption in China as the key to rebalancing the global economy.
International investors are counting on Chinese domestic demand, too, because in recent months, they have pumped billions of dollars into mainland consumer-sector stocks as a play on the future growth of the market.
But nowhere do people hope more fervently for the emergence of China's consumers than in the neighbouring countries of Southeast and East Asia.
In the years since the Asian financial crisis, countries around the region have relied on exports to the rich world, and to the United States especially, to power their economic growth.
But when the financial crisis erupted last year, demand from the developed world dried up, plunging the region into recession.
Government stimulus measures have since helped kick-start growth again. But with US consumer confidence still weaker than at almost any time in the past 40 years (see the first chart below), the chances of an early recovery in exports to the rich world look slim.
As a result, countries around Asia are hoping that Chinese demand can take over as the main locomotive for their export-led economies.
As a research report published last month by the Asian Development Bank puts it: 'The underlying idea is that a fast-growing China's growing appetite for imported final goods from the rest of the region will compensate for weaker demand in the US and other industrialised countries.'
At first glance, the prospects look good. As the second chart below illustrates, the share of intra-Asian trade in the region's total shipments has grown strongly in recent years, largely thanks to China's emergence as an economic powerhouse. Overall, more than 40 per cent of the region's exports are now shipped to China.
What's more, research by the ADB indicates that for the developing economies of Asia (with the exception of India), growth is already more closely correlated to their exports to China than to their exports to the US, hinting that Chinese demand may already be the most powerful locomotive of regional growth.
Unfortunately, however, there is a problem with this conclusion. It may appear as if the exports of Asian countries to China are now a greater contributor to their growth than their exports to the US. But in reality, a sizable proportion of those exports to China are destined for processing and re-export to the rich world. According to the ADB, only about half of Asia's intra-regional exports are powered by final demand from within the region.
As a result, the ADB's researchers recalculated their numbers. For each country in the region, they related overall growth rates not just to exports to China and exports to the US, but to China's exports to the US as well.
This time, they got a different and far more depressing answer. The growth rates of Asian countries are highly correlated to China's exports to the US, indicating that US final demand remains the ultimate driver of regional growth.
That could change in the future of course, but in the meantime, don't get your hopes up.