Asian Macro-Economic Strategies: China's Increasing Impact on Global GDP

Friday, January 14, 2011

China's Increasing Impact on Global GDP

In the past six years, the Chinese economy has started to have a material impact on global GDP growth. Over the 2004-2010 period, China's GDP correlation with global GDP correlation has improved with the R Square rising to 40% from 14% in the 2000-2004 period and 1% in the 1980-2000 period.

While the U.S. and European economies, which together account for half of global GDP remains the biggest drivers of the global economy, China's impact on growth is getting larger over recent years.

Being the second largest economy in the world, one would have thought that China's correlation with global GDP would have been higher. But the rebound in the U.S. and G7 economies from the recession of 2009 has pulled up global GDP by a bigger swing than the rebound in China, which is estimated to have grown by 10% in 2010 versus 9.2% in 2009.

2 comments:

angilaj2February 24, 2011 at 2:05 AM
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NehemiahFebruary 24, 2011 at 7:48 PM
Hi Emily

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The Asian Economic Character

Asians' economic behaviour are characterised by:

1. Net savers with insufficient domestic channels for wealth preservation.

2. Low but rising per capita income relative to their Western peers.

3. Growing appetite for consumer goods and services tempered by savings behaviour.

4. Priority to save for children's university education.

5. Submission to authoritative figures (e.g. government) on the part of the older generation.

6. Increasing demand for intellectual freedom and independence from authoritarian regimes on the part of the younger generation.

7. Mercantilist tendencies of policy makers to accumulate foreign exchange reserves by keeping their currencies and exports competitively priced.

8. Deep-rooted faith in supernatural and traditional values. However, the younger generations' values and expectations are shifting towards less restrictive cultures. Growth in Christian believers in China, Indonesia, Korea, etc.

The Policy Crisis Facing Asia's Economies

Asia's economies require a set of unique policy reponses to today's unprecedented global economic and financial crisis.

This response needs to go beyond current policy templates which are based on short term objectives to pump up growth via monetary and fiscal stimulus. These initiatives will be short-lived as long as the following long-term structural impediments to growth remain:

1. The continued reliance on the West to be the main buyer of Asia's exports while domestic demand remains undeveloped.

2. Because of the above, continued mercantilist policies seeking advantages in currencies and pricing of goods by keeping currencies cheap and labour cheap.

3. The disparity between the haves and have-nots is still 10%:90% in many countries, creating political instability in places like Thailand and potentially China if the rural poor remains poor and joblessness increases.

4. The demographic time bomb when Asia's population starts ageing with the exception of India, Indonesia and Msia in the next five years.

5. Economic reforms without corresponding political reforms will continue to hamper effectiveness of government policies.

6. The current commodity slump will hurt parts of Asia that are net commodity exporters.

7. The subsidy policies of keeping commodity-related prices stable amidst rising international prices will misallocate resources and distort consumption patterns.

8. Lack of workable pensions funds sector and viable domestic bond market to absorb excess savings which are being used to develop export capacities and reinvested in foreign assets.

9. The inclination to replicate the Anglo-Saxon model of consumer-led and asset-based economic growth will cause Asia's economies to replicate the boom-bust cycle of the West.

10. Lack of interest in developing intellectual freedoms and creativity at the tertiary and university levels will constrain innovation in sciences and the arts.

Asian Macro-Economic Strategies

Friday, January 14, 2011

China's Increasing Impact on Global GDP

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