Will China save the rest of the world from crisis? The question has to be asked the other way around.
Recent trade numbers give a worrying signal of what may come next. After declining by 2.8 per cent year on year in December, the mainland's exports plummeted 17.5 per cent in January. These numbers are not as bad as those reported by some other Asian countries. In December, for example, Taiwan's exports fell by 42 per cent, South Korea's by 17 per cent and Japan's by 35 per cent.
But it is precisely this relative outperformance that indicates the severity of the adjustment yet to take place. China's trade surplus for January was a massive US$39.1 billion, just under November's record US$40.1 billion. In comparison, in the first half of last year the average monthly trade surplus was an already high US$16.7 billion.
This suggests that as a trade surplus country, China has so far managed to avoid taking its share of the global contraction in net demand (total demand minus total production, equal to the trade deficit, which in the case of a surplus represents negative net demand). Chinese exports have fallen, but imports have fallen faster, so China's net demand is declining when it should be increasing, forcing its trading partners to absorb more than 100 per cent of the global contraction in net demand.
This cannot continue. It will almost certainly lead to an increase in trade friction, which would be devastating for trade surplus countries. In any event, China's trade surplus is such a large share of global trade surpluses, it is very unlikely it can continue to avoid the adjustment the rest of the world is making.
The worst case for China is global net demand continues contracting rapidly, with Americans and Europeans drastically cutting spending and increasing savings. This would force the country to reduce excess capacity equal to more than 10 per cent of gross domestic product, which in the past it was able to export.
