China Can't Do It Alone

Manila Bulletin, March 21, 2010 | Go to article overview

China Can't Do It Alone


Despite the increasing worries about a possible asset bubble bursting in China, the immediate prospects in this largest Asian economy continue to be bright. The domestic market is increasingly replacing exports as the engine of growth. Any danger of an asset bubble may still be five to ten years down the road.It is possible that before 2010 is over, the U.S. and China will be the two largest economies in the world. In 2008, the U.S. had GDP of $14.4 trillion, Japan had $4.9 trillion while China posted $4.3 trillion. With the U.S. and Japan succumbing to the Great Recession of the last two years while China hardly experienced a blip, it is a certainty that China will surpass Japan in GDP in the course of this year. With the U.S. facing the possibility of a double-dip recession in the next year or so and Japan probably seeing a repetition of its lost decade in the 1990s, China will clearly outshine the G-2 of the last century. Given the widespread expectation that U.S. demand will stay subdued for a while, especially as regards consumer spending, the U.S. can hardly be expected to be part of the dynamic duo. A more likely partner of China in stimulating the world economy is its giant neighbor, India. In an IMF report that appeared last February 4, 2010, India's economy was cited as one of the first in the world to recover after the global crisis. To quote from the IMF report, "Prompt fiscal and monetary easing, combined with the fiscal stimulus already in the pipeline and the return of risk appetite in financial markets, have brought growth close to pre-crisis levels. Leading indicators suggest the output gap will continue to close. Capital inflows are back on the rise, and financial markets have regained most of the lost ground."India is the only major economy in the world that has joined China in recovering lost ground suffered during the Great Recession within a year. China was back to its pre-crisis growth of 9 to 10 percent as early as the fourth quarter of 2009. Similarly, GDP growth in India is projected to rise from 6.75 percent in 2009 to 8 percent in 2010, which was its pre-crisis average growth rate. Its economy may temporarily face the challenge of the ongoing drought, but IMF estimates that nonagricultural GDP growth is expected to gather momentum. Private consumption will be boosted by brighter employment prospects and less uncertainty. Investment is expected to benefit from robust corporate profits, rising business confidence, and favorable financing conditions. As advanced economies like the U.S. and Japan grow below trend, India is expected to expand at 7 to 8 percent in the medium term.The two giant economies in Asia can play a major role in rebalancing the global economy. As the largest economy in the world, the U.S. suffers from unsustainable fiscal and current accounts deficits, other large markets in the world must replace the American consumers as the global economic engine. As Master Card chief economist Yuwa Hedrick-Wong wrote in Consumption Trends in the US and China (1Q2010), "the global imbalance of over-consumption in the U.S. and under-consumption in much of Asia, in particular China, from which so many macro economic ills are seen to have emanated, is also deemed a major contributing factor to the global financial crisis. The imbalance undoubtedly exists. In early 2008, private household consumption in the U.S. accounted for about 72 percent of GDP, and, in sharp contrast, it was 37 percent in China. The shock of the global financial crisis pushed American households to start saving more and consuming less. Household savings rose from negative in 2008 to around 5 percent by mid-2009 in the U. …

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