Denying China's Economic Clout

As recently as the end of last year most business commentators on Bloomberg and CNBC were breezily brushing aside any suggestion that China’s continuing robust growth might help pull the West out of the Great Recession. Their reasoning? That China’s GDP is only a third of the U.S.‘s and that China’s consumers just don’t have the spending power to impact U.S. companies.

This kind of thinking persisted even as China passed the U.S. in auto sales, passed Japan as the no. 2 economy in real terms and as the leading holder of U.S. treasuries.

Today the impulse to discount China’s economic clout has been forced underground and has mutated into breezy references to the imminent collapse of China’s presumed real estate bubble. The implication is that China’s 10-plus-percent growth through the recession is an illusion conjured by a closed system manipulating economic data.

The short answer to these skeptics is that the rise in the real standard of living for average Chinese is no paper prosperity but palpable in the cars they drive, the apartments they live in, the food they eat, the energy they consume, the products they import and export. For me the most telling statistic is that in June China’s imports jumped 53% while exports grew just 35% year-on-end. This isn’t just some fluke but a consistent trend over the past year at a time when the west most needed the help. Even back in January China’s imports had skyrocketed 85.5% while exports had risen just 21%.

To be sure, China continues to enjoy a large trade surplus with the rest of the world, including the U.S. But if the current trend continues, that surplus will turn to a deficit in about a year and a half. Even our much-bemoaned trade deficit with China is easing rapidly. In Jan.-May 2009 our exports to China totaled $24.8 bil. and our imports $109.5 bil. In Jan.-May 2010 our exports to China totaled $34.5 bil. and our imports $127.8 bil. Trade hawks see only that the dollar value of our deficit grew. The more meaningful change is the rate of growth in percentage terms. U.S. exports to China jumped a whopping 39% while China’s exports to the U.S. rose only 16.7%. If this trend continues, the U.S. will be enjoying a surplus with China in about six years.

But of course the ultimate value of international trade isn’t measured by success in maintaining a zero balance. That can be done simply by prohibiting all trade. But businesses and consumers in both countries would lose. Trade exists because both sides enjoy a benefit from buying what the other side produces most efficiently. This exchange of benefits stimulates consumption and production on both sides, bringing about economic growth and rising living standards. Buying $127.8 bil. of inexpensive Chinese-made machinery and clothing left us more money for vacations and dinners out, just as selling $34.5 bil. worth of airplanes and food to China gave us profits with which to buy more Mideast oil and Japanese cars. The sheer volume of China’s trade with us, and its ability to keep that trade growing through hard times, gives it very real clout with which to help stimulate U.S. economic activity and help drive a recovery.

When a nation with a real GDP on a PPP basis of $7.5 tril. grows consistently at a 10% annual clip, it has far more global economic clout than a nation with a GDP of $14 tril. growing at a 0.44% pace (U.S. in 2008) or the same nation shrinking at a -2.73% pace (U.S. in 2009). The assumption that a country as big as China growing as rapidly as China didn’t have the pulling power to help drive a global recovery reflects minds still shellshocked by a world in which the U.S. consumer is no longer the economic sun. A good thing too, or we would all still be caught in a downward spiral for which the sucking sound is provided by the collective gasp of U.S. consumers panicked by a dawning awareness that the financial system to which they had been giving full faith had really been a house of cards.

Perhaps the most important evidence of China’s economic clout is its ability to insulate itself from the Wall Street feeding frenzy at the trough of unchecked greed posing as a well-regulated capitalist system. Had Beijing succumbed to decades of global pressure for it to “open up” its financial system and become “transparent” to Wall Street, there would have been no rock on which the global recovery could have moored.