Don’t even look at China for help -Financial Times-

Tweet

Chinese premier Wen Jaibao threw some shade on the eurozone on Wednesday, and the US too — insisting they get their own fiscal and monetary houses in order and recognise China as a market economy if they really want to see some investment.

His own house didn’t look so great, either, when the Asian Development Bank challenged the likelihood of a much hoped-for Chinese soft landing with its updated outlook. It raised the inflation forecast for China, while cutting growth forecasts (hmm… stagflation, anyone?).

From the ADB’s press release:

The slowdown in demand from the United States (US) and Europe continues to cast a cloud over the region, with export growth easing substantially in the second quarter of 2011 in leading economies, including the People’s Republic of China (PRC).

However, it goes on to say:

“At the same time, strong domestic consumption and expanding intraregional trade are helping to underpin still solid growth levels,” said Changyong Rhee, ADB’s Chief Economist. “Since the onset of the global recovery, the growth in exports to the PRC from several Asian economies has been stronger than their exports to the rest of the world.”The share of intraregional exports among the largest economies in the region has increased from 42% in 2007 to 47% in the first half of 2011, the report noted.

But these growing Asian exports to China may not be all they seem, according to Michael Spencer at Deutsche Bank, who has tackled the assumption that a new round of Chinese stimulus cushion could the impact of a US/EU painfully slow recovery/recession for its own part of the world.

A lot of those Asian exports to China have another ultimate destination, writes Spencer:

Athukorala (2011) calculates that in 2009, 45.8% of intraregional exports in emerging Asia and fully 75.1% of intraregional imports were parts and components. 1 By comparison, in Latin America only 16.7% of intra-regional exports and 14.7% of intra-regional imports were parts and components. As intermediate goods are shipped across multiple borders in Asia, therefore, they are counted many times, inflating the ratio of intra-regional to total exports.

Plus (emphasis DB’s),

The prevalence of trade in parts also makes it difficult to identify final demand just by looking at the direction of trade. Kim, Lee and Park (2009) estimate that in 2004, while 40% of emerging Asian exports went to other emerging Asian economies, almost half of those exports went into goods that were exported outside the region. Only 22% of the final demand for Asian exports lay within Asia. The G3 accounted for 59% of final demand for Asian exports even though they accounted for only 32% of direct exports.2

In otherwords, some of these exports are being counted multiple times. (One thought that occurs: if this movement of manufacturing away from China due to rising costs accelerates, might that trend also be double-counted as a decrease in intra-Asian exports?).

There’s no doubt, of course, that some of those non-Chinese Asian exports do in fact end up being consumed in China. A growing proportion, in fact. But Spencer shows that there is a reasonably strong correlation between exports from several key Asian economies to China, and those to the US and EU:

And it goes further than simply components and parts that are then assembled in China and exported to the developed world; there’s also the effect of China’s exports to the US and EU on its demand for Asian goods.

That is, if the income used to import goods into China is derived from exporting goods to the US, then the final demand from China will rise and fall with US growth.

To get more of a handle on how important that might be, he constructs a recursivevector autoregression model to capture the effects of changes in US growth, inflation and interest rates on Chinese growth and inflation; and then in turn on the growth and inflation rates of other Asian economies. And the result?

On growth, he concludes (emphasis ours):

With the sole exception of Indonesia, we find that Chinese growth is an insignificant source of growth in Asia Pacific economies. But US and EU growth fluctuations are veryimportant to most economies. Hence, downside risks in the US and Europe are far more important to the growth outlook for Asia Pacific economies than any potential upside to China by virtue of stimulus applied there.

Oh, well. If you’re feeling perversely bullish, this analysis could also suggest that it doesn’t matter quite so much whether/when Michael Pettis is proved right about a huge slowdown in Chinese GDP growth.

Financial Times.