There's been a lot of chatter over the last month or so about whether China will come to the rescue of the world economy. Sadly, it is ill-informed. With growth once again stalling in the United States and Europe, believers argue that only China's economy now has the strength to support continued growth around the world. This idea of China as a potential saviour of world output was given further impetus yesterday by Premier Wen Jiabao, who told a World Economic Forum gathering in Dalian that 'China's economy will make a new contribution to robust, sustainable and balanced growth in the global economy'. Wen even offered some special comfort to crisis-hit European countries, saying China would offer a 'helping hand' to the continent by investing in its economies. Yet the idea that China will contribute much to economic growth in the rest of the world, either through domestic consumer demand or through stepped-up outward investment doesn't stand up well to examination. To see why, it helps to conduct a simple thought experiment in which the world consists of just two economies: China and the Rest of the World, which for the sake of brevity we will call RoW. Now, if we look at China's balance of payments, we very quickly see that China runs a trade surplus with RoW. Last year, for example, China's trade surplus with RoW came to US$184.5 billion, or a little over 3 per cent of China's gross domestic product. That means, China's net demand for RoW's goods and services is negative. Far from acting as a locomotive of demand, China actually acts as a drag on the rest of the world's economy. For China to turn into a real engine of demand, its trade balance with RoW would need to swing from surplus into deficit. And although China's trade surplus has shrunk since the financial crisis of 2008, there is little chance it will turn into a deficit any time soon. Admittedly, trade is only part of the story. In recent years China has also emerged as an increasingly important source of direct investment into the rest of the world. According to the United Nations Conference on Trade and Development, China made outward investments worth US$68 billion in 2010. That sounds impressive, but in the same year, according to Unctad, the rest of the world made direct investments in China worth US$106 billion. In other words, China ran a net direct investment deficit with RoW of US$38 billion. In truth, both these figures are suspect, largely because of the role played by Hong Kong in round-tripping Chinese capital to take advantage of mainland tax breaks. Even so, far from fuelling growth in the rest of the world through net outward flows of direct investment, China was actually a massive net recipient of capital from RoW. Granted, this is a very simplistic picture. Although China's net trade and investment flows may not contribute to growth in the rest of the world as a whole, they do have a powerful stimulative effect on local growth rates in some parts of the world. A look at China's bilateral trade balances shows that last year it ran trade deficits greater than US$10 billion with 10 countries As the first chart below shows, these countries tend to fall into two broad categories: manufacturing exporters in Asia and commodity exporters. China's demand is certainly good for growth in these countries. Although, strictly speaking, in the case of Asia's manufacturing exporters much of the demand isn't actually from China. Some of what we see here is Chinese demand for capital goods, but mostly it is evidence of Asia's processing trade, where components are exported to China for assembly and onward shipment to developed markets, the source of the final demand. Still, there is no doubt that Chinese demand and investment supports growth in many of the world's commodity exporters. China's outward investment in 2009, stripping out Hong Kong, Macau and Singapore to eliminate round-tripping, shows that by far the biggest beneficiaries were commodity-rich countries (see the second chart). So when people talk about Chinese import demand and outward investment powering economic growth in the rest of the world, they really ought to be a bit more specific about where exactly in the world they mean. A look at the data shows that net demand and investment from China really only drives growth in a handful capital goods manufacturers and a few commodity exporters. The rest of the world benefits little.