Point One: Importance of the US export to Chinese growth
There are two parts to this. First, Chinese growth is not entirely export-led. There is a substantial amount of growth in the domestic economy, fueled in large part by an ongoing explosion of building activity.
Now, as we should all be critically aware, a building boom can continue as long as there is credit to finance the construction. With that credit, the construction activity itself provides a substantial income driver, and that income provides the growth in consumer incomes and business activity that then provides the means and motivation to make use of that credit.
The Chinese credit expansion is fraught with structural problems. But as we saw in the US, structural flaws on their own do not bring a boom to an end, until there is a realization of some systematic risk that realizes additional systematic risks that, when realized, realized additional systematic risks, and so on. We in the US are presently in the middle of the second or third wave of that uncovering of previously covered clusters of systematic risks, with growing worry that the next wave will involve uncovering the systematic risks associated with a recession.
However, the important point here is that the Chinese are exercising some modest restraint on credit, so in the event of a slackening of export demand, they have one or more "Greenspans" up their sleave.
The second part was brought into the discussion by someone else, when I said in a carefully qualified:
Our market is not as important to China ...
... as all that. It may be the most important single national market, but its certainly not a majority of Chinese exports, and exports are not the sole growth driver in the current boom.
So it depends largely on whether its a synchronized slowdown with Europe and Japan. The Chinese economy will certainly continue growing if its merely the US in recession ... its post-Olympics where I would be more worried about a slowdown in the Chinese boom.
by BruceMcF (agila61 at netscape dot net) on Fri Sep 14th, 2007 at 08:07:29 AM EDT
... and redstar
Re: Our market is not as important to China ...
Depends on how you define National.
If memory serves, the EU is a more important trading partner now to China than the US is mine de rien...
by redstar on Fri Sep 14th, 2007 at 11:32:09 AM EDT
So the US is not a larger export market than the EU. If the recession is not a synchronized global recession ... the single most important qualifier to this entire thesis ... less than half of the export market will be hit, from the perspective of most Chinese industries.
And further, it seems likely that Chinese exports will not decline in proportion to a US economic slowdown. While the Chinese have climbed into higher end market niches, they have not abandoned their position at the bottom end of most markets that they sell into, and so for many Chinese exporters, a US recession will not mean a collapse in demand. And, further, declines in demands for normal goods (in terms of income elasticity) will be partially offset by increases in demand for inferior goods (in terms of income elasticity).
And at the same time, the Chinese do not have the same position in many markets for consumer durables than for markets for consumer staples. They certainly have a greater position than would appear from "Made in Chine" labels, since their primary stake in many consumer durables is as a component manufacturer. Still, in terms of total value added, the Chinese have a stronger position in American consumer staples than, for example, the Japanese or Koreans.
So an unsynchronized US slowdown will not represent the loss of the majority of the primary Chinese growth driver, but rather the loss of a large but minority share of one of several Chinese growth drivers.
OK, so far, this has been about the capability of avoiding a recession. However, forestalling a recession may well lead to making existing structural problems worse in the not so distant future. So, will the Chinese exercise this capability if they can?
Well, yes, certainly. If the Chinese have the capability of forestalling a domestic recession until after the Olympics, they will do so.
Point Two: The Decline in the US dollar
This is much shorter, but it is a point that needs to be made in the run-up to the third point. That is, modern foreign exchange markets for high income economies are dominated by capital account transactions. Depending on the currency, capital account transactions can represent more than 80% to more than 90% of total currency exchanges.
It is common in the modeling of exchange rates in traditional marginalist economics to argue as if trade (the dominant current account transaction) dominates exchange rate determination. And this makes sense under the presumptions of traditional marginalist economics, where foreknowledge is presumed perfect except where explicitly argued otherwise and money is presumed to be neutral except where explicitly argued otherwise. Neutral international money implies that capital account transactions are effectively barter taking place arbitraging real values over time and space, as opposed to current account transactions, which are effectively barter arbitraging real values over space alone.
However, out here in the real world, that is a load of nonsense. Capital account transactions are handing money over in return for an obligation by the recipient to do something ... presumably something representing monetary value ... at sometime in the future. And if the US slides into recession, the appeal of buying a financial promise from people within the US economy will drop, while the appeal within the US of buying a financial promise from someone outside the US will rise. This effect is only amplified by the ongoing US credit rating inflation over the past two decades, which weakens the credibility of US financial assets rated as representing "safe havens".
So the US dollar, its going to keep on going down, if a recession hits.
Point Three: The opportunity of the US to recapture lost markets
As the US dollar slides down, that implies, for international real commodities like iron ore, coal, oil, limestone, etc., a rise in US dollar price. And that would seem to represent the undermining of the argument in Point One ... because the boost from easing up on the (extremely modest) restraints on Chinese credit could easily be swallowed up whole by imported inflation in the raw materials required by the construction industry.
However, the Chinese have substantial leeway in a simple policy tool that can restrain that imported inflation. The Yuan/Renminbi is presently pegged to an exchange rate that is steeply discounted compared to the average that would prevail if the Bank of China pursued a dirty float. And the Chinese have already adopted a hidden peg system (the Singapore model), where they peg against a basket of currencies, with neither the peg nor the composition of the basket made public ... though it seems clear that when the policy replaced the open dollar peg, the basket was still overwhelmingly composed of dollars.
However, the Chinese are free to adopt a policy of steadily increasing the share of Euros in the peg, with a corresponding reduction in the share of the US dollar. And I expect that they have a margin to work within, because a modest increase in the strength of the dollar against the Yuan ... while the Yuan continues to depreciate against the Euro, and likely depreciates or holds relatively stable against currencies like the Pound Stirling and Australian dollar ... will not open the door for US manufacturers to retake big chunks of lost ground in domestic or export markets.
That is, the price advantage that Chinese industry required to drive US industry out of existing market positions is less than the price advantage required to hold onto those market positions. The new supplier relationships, new transport systems, unfamiliarity with the pitfalls of buying from Chinese producers ... all of those are in the nature of infant industry costs. Once the market position has been won, those costs decline ... and for some of the transition costs, they reverse, where dropping the existing Chinese supplier and replacing them with a US (or more likely Mex/American) supplier now faces similar costs.
And by the same token, if the US enters a recession, its trade deficit will automatically improve, reducing the current account surplus it requires to balance that deficit, and the Bank of China can afford to buy fewer US dollars and more Euros, as is required to implement the shift in the share of the currencies in the currency basket. And of course that shift further increases the ability of the EU market to have a trade deficit with China, which is more important to China's export producers if the US is in recession and the EU is not.
So the Chinese can afford, both in terms of their global export position and in terms of avoiding a global financial collapse, to allow the Yuan/Renminbi exchange rate to float upwards, to prevent imported inflation, in particular in raw materials, from spoiling the short term domestic building boom.
At least, that is, until the 2008 Olympics.
So that's why I think that China can weather a US recession. Mind you, I'm a regional development economist, so YMMV.