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This time China has no lifeline to throw us
The eurozone crisis is threatening the entire world economy. Unlike in 2008, Beijing cannot step in as saviour
10 Oct 2012
Stephen King, Group Chief Economist
The Seventh Cavalry always rode to the rescue, particularly in Hollywood movies starring Randolph Scott. As the world economy teetered on the brink in late 2008, the economic equivalent of the Seventh Cavalry did much the same thing, with Scott's heroic role taken by Chinese Premier Wen Jiabao.
Faced with an export meltdown and the risk of domestic paralysis, China reached for the smelling salts. Offering interest rate cuts and huge increases in infrastructure spending, China's economy galloped away. Early in 2009 many thought the Chinese economy would expand at a distinctly sub-par rate – at least by its own standards – of a mere 7 per cent. In the event, the economy grew 9.2 per cent followed by a whopping 10.4 per cent in 2010.
China's policy boost didn't just offer support at home. It also helped to save the world economy. As the infrastructure projects took off, so China's imports surged, triggering a much-needed recovery in world trade. In 2010 alone, Chinese imports rose an extraordinary 33 per cent, leading to a spectacular decline in China's trade surplus. Thanks to China, other parts of the world recovered very quickly. Latin America and the rest of Asia regained their earlier poise. Even the US had reason to be cheerful: Washington had been demanding a reduction in China's trade surplus for many a year and, finally, Beijing was delivering.
This year, the world economy has again looked vulnerable. Admittedly, there hasn't been a horrible Lehman-style moment, but there has nevertheless been a remarkable slowdown in world trade, thanks primarily to the eurozone crisis. Unfortunately, the Seventh Cavalry hasn't yet turned up.
It is a brutal, yet remarkably simple, tale. With hardly anyone prepared to lend to the nations of southern Europe, they can no longer spend as they once did. Their journey from princes to paupers has triggered a dramatic global convulsion. Remarkably, the hit from the eurozone crisis has been bigger than the hit from the US recession in the first nine months of 2008, pre-Lehman.
Yet China is no longer in the mood to provide a massive stimulus. China's trade surplus is still falling, just as it did in 2010, but no longer is the decline the result of rapid import gains: instead, China's exports have succumbed to the downswing in world trade. Once the global economy's saviour, China has become its latest scalp.
Faced with the eurozone shock, Beijing no longer has the appetite for massive stimulus.
While the rest of the world welcomed China's post-Lehman stimulus, Beijing was more ambivalent, at least with the benefit of hindsight. Chinese inflation picked up rapidly, leading to an unwelcome increase in income inequality: while the urban elite had no difficulty forking out a few more yuan to spend on life's basics, the same didn't hold for the rural poor. Property prices soared, leading some to worry that China was about to suffer its own version of a sub-prime crisis. Others, meanwhile, began to worry that China was heading the way of Japan, which suffered two lost decades following a boom in the late 1980s.
Fearing an unsustainable bubble, Beijing last year slammed on the policy brakes. Inflation was brought to heel, the property market went into reverse and the economy slowed down. China's policymakers breathed a huge sigh of relief: having allowed the inflation tiger to maraud up and down the country, it had now been coaxed back into its cage.
Faced with the eurozone shock, Beijing no longer has the appetite for massive stimulus. While its policymakers may do enough to stop China's growth rate from collapsing, that's not quite the same thing as making China the offsetting counterweight to
The combination of eurozone crisis and Chinese caution has resulted in an unfortunate rebalancing of the global economy. Ahead of the sub-prime crisis, many observers worried about so-called global imbalances: large trade surpluses in China, Russia, Saudi Arabia and Germany and equally large trade deficits in the US and southern Europe. If only these imbalances would narrow, it was argued, the world would be a happier place.
They have narrowed, yet the world is far from happy. Imbalances can shrink for all sorts of reasons, some good, others bad. In 2010, it looked as though we were on the cusp of a positive story. China's strong domestic demand led to more imports, reducing China's trade surplus. More Chinese imports, in turn, meant more exports for everybody else and, hence, smaller trade deficits.
Today, the story is rather more disturbing. Southern Europe's collapse has slashed its demand for imports, reducing its trade deficit. The corresponding drop in exports to southern Europe has, in turn, reduced others' trade surpluses. This is rebalancing of the most painful kind.
Absent a Chinese counterweight, the eurozone's problems are threatening the health of the world economy.
The list of vulnerable exporters has lengthened as the year has progressed. The biggest losers have been in the emerging world, emphasising the fact that these countries, collectively, are now the workshop of the world. Taiwan, Mexico, Thailand, Malaysia and India have all seen a dramatic slowdown in export growth as inventories have risen and production has been shelved.
Germany, too, is beginning to suffer, proving that no amount of competitive pride can protect a nation from a fall in demand in its major trading partners. The UK's export growth hasn't slowed quite as much, but that's only because our exports weren't growing very much in the first place.
While it's tempting to write Europe off – it is, after all, emblematic of "old world" stagnation even as other, more dynamic, economies offer so much promise – it still packs a huge economic punch. Absent a Chinese counterweight, the eurozone's problems are threatening the health of the world economy.
China, for its part, has discovered that "rebalancing" is not so easy after all: its domestic product and financial markets are not robust enough to cope with huge policy stimulus without leading to domestic problems, such as inflation, which, from Beijing's perspective, are more troubling than the external imbalances of old. And while growth in the emerging nations should provide succour over the long run, these countries have yet to gain full immunity from the old world. They may be our future, but they're offering little protection in the present.
Our modern-day Seventh Cavalry seems trapped at the economic equivalent of Little Bighorn. Who, now, will fill Randolph
Stephen King originally wrote this article for The Times newspaper, published on 10 October 2012.