China’s cooling imports are sending a huge chill across the global economy

The mainland’s slump in consumption removes a major pillar of the global growth story

PUBLISHED : Tuesday, 07 June, 2016, 10:43am
UPDATED : Tuesday, 07 June, 2016, 10:55am

As policymakers in China strive to rebalance the Chinese economy away from an investment-led to a consumer-driven model, a lot of economies in Asia and beyond are going to feel the chill, as a succession of recent papers issued by the International Monetary Fund (IMF) illustrate.

The scale of China’s economic clout is succinctly described in a recent IMF Working Paper (WP) titled “Chinese Imports: What’s Behind the Slowdown?”

“During 2000-2014 China accounted for one third of global growth,” said the Working Paper, published last month, noting that over the same period “exports to China increased dramatically from 3 per cent to 9 per cent of world exports and from 9 per cent to 22 per cent of regional exports”.

“China accounts for over a quarter of exports and imports of emerging and developing economies and is one of the main trading partners (top 10) for over 100 economies that constitute about 80 per cent of world GDP,” it added.

But “real imports in China have decelerated significantly over the last two years to below

4 per cent (year-on-year) from double-digit growth in previous years,” the paper said.

Whether the drivers of that fall in imports are, as the authors of the Working Paper contend, weaker investment as a consequence of the rebalancing of the Chinese economy towards consumption, weaker exports in the face of reduced global demand that then lessens China’s own demand for imported inputs, or onshoring as Chinese domestic production is substituted for imported goods, the implications are international.

A separate IMF Working Paper “China and Asia in Global Trade Slowdown,” also published late last month, has analysed the potential effects of China’s economic rebalancing.

And while “a successful rebalancing will lead to a more balanced and sustainable growth model for China, thereby benefiting the whole world in the long run,” its authors argue, in the short term other countries’ exports to China could flag.

While there are some winners, there are quite a few losers in the IMF Working Paper’s analysis based on the export profiles of 62 countries in the period 1995-2011.

As regards Asia, in which the IMF Working Paper’s authors have also included Australia and New Zealand, the data shows that Asian countries as a whole “have a high relative exposure to China’s investment (vis-a-vis consumption) when compared with the rest of the world”.

That leaves Asian economies potentially exposed if their export profile fails to adapt as China’s economy rebalances away from investment towards consumption.

But even within Asia there is differentiation. New Zealand, the Working Paper argues, has “expanded the roles of consumption goods and services exports to China” while Taiwan “has become closely integrated with China through a substantial exposure to China’s investment” via, for example, sales of machinery for use in China’s own manufacturing sector.

“As such New Zealand is likely to be in a better position than [Taiwan] to absorb spillovers from China’s rebalancing,” the IMF Working Paper concludes. South Korea is in a similar position to Taiwan, but, it should be noted, Hong Kong’s export profile is seen as better balanced.

But the spillover effects of China’s economic rebalancing go beyond the first round impact on those who export to China.

The June edition of the IMF’s online publication “Finance and Development” (FD) includes a piece titled “A Fork in the Road” looking at China’s economic relationship with Africa and illustrating second round effects of China’s rebalancing.

While, in December 2015 China’s “President Xi Jinping promised US$60 billion in financing for Africa over the next three years,” the fact remains that “the Chinese Customs office announced recently that China’s imports from Africa fell by almost 40 per cent in 2015,” the article notes, as China’s appetite for commodity imports from sub-Saharan Africa waned.

But “the spillovers from China are not limited to direct channels such as lower export demand and global commodity price declines. There are also effects from one African economy on another,” the article adds.

China is an important export market for countries such as, South Africa, Zambia and the Democratic Republic of Congo but those three are in turn major import markets for other African economies which then also feel, second-hand, the downdraught from China’s rebalancing.

Eventually, the global economy should benefit from China’s pivot towards a more consumption-led economic model but “for most countries,” the IMF Working Paper on the global trade slowdown concludes, the “spillover effects from the rebalancing of China’s demand are negative in the short term”.

There’s no denying it, China’s imports are a matter of global importance.