Monday, February 22, 2010

Chinese Economy Collapse

Hi, I would like to ask if China went into a recession, would that make the economies in other countries that are currently in recession better off? In other words, would it improve relatively the state of the economy in other countries considering the standard of the market has fell?

If China went into a recession, it would adversely affect other economies.

China's economy is primarily based on exports. But, as one of the largest economy it is still a significant importer, especially of raw materials. If China went into a recession, global commodity prices and demand for commodities would probably fall. This would be bad for economies like Australia and Canada which produce significant amounts of raw materials.

If China went into recession, there would be an adverse effect on world trade. China would buy less imports and this would lead to a slowdown in global trade. It could also have a significant effect on global confidence, causing sluggish global growth.

I was interested to recently learn that the UK exports twice as much to Spain as it does to China. Therefore, we might expect a recession in China to have limited effect on UK economy. But, the Chinese economy is such an important influence on global economy that the UK would be effected indirectly.

There are also a few uncertain outcomes. For example, in a recession, would China still have a large current account surplus? (you would expect the surplus to remain). In that case, China may continue to buy dollar assets and it would have an incentive to try and keep its exchange rate low.
  • It depends why a recession in China occured? - was it due to a collapse in external demand or due to a tightening of Chinese Monetary policy.
  • Would the recession affect other Asian countries as well?
  • A recession may well heighten trade tensions and could lead to a rise in protectionist sentiments.

Impact of Chinese Recession in China

The biggest concern over a recession in China would be the impact on China itself. The transition from a rural economy to an urban economy has been so swift that it has been estimated that China needs a growth rate of 7.2% to prevent a rise in unemployment. [1] Negative growth could have a devastating effect on Chinese society - where there is little if any unemployment insurance.

Chinese Economy vs US Economy

If Chinese GDP fell, the US may gain a bigger share of world GDP; therefore it may be doing relatively better than China. But, a recession in China would damage the absolute living standards in the rest of the world.

How Likely is a Chinese economic Collapse?

I can't see it in the short term. But, a significant downturn is quite possible. This question would need more analysis though



Beauty and Health Editor said...

I don't see it in the short term either.

Products coming from China are so cheap and the people over there know how to work hard and fast, unlike the UK.

Basically, they are good at what they do and very enterprising.

I think one of the current threats they face is the legislation concerning their herbal remedies, because they currently make a lot of money in that field from information gathered by a handful of people who buy their herbs and things.

I can add a whole lot more, but it's late and I have to get to bed. I'll be back to post more comments once I can think up some valid points.

pratclif said...

You are looking at China in a mainstream economics way. Global trade, global exponential growth of everything for ever! After 60 years of growth since the end of WW2, we in the west are saturated and we have had to go global to keep the system growing.... China has become market oriented and so has India, together with 2.5 billion people ie. nearly 40% of global population. So it is almost a truism to say that if China stops growing, everyone is going to be affected. To me the question is not there; it is: where economic growth is going to lead us, if the level reached by our model of richest countries is applied to 40-50% of 8-9 billion people in 2050. What you economists have to devise is a way of producing and consuming which doesn't need exponential growth and accumulation of capital for ever, to function. A way of producing and consuming that is socially acceptable....

Basudeb Sen said...

A recession in China is unlikely - at least there is no wat a Communist economy largely controlled and directed by Government fiat can allow a recession. But should there be a fall in domestic demand, China will try to increase exports more and buy more from abroad to process domestically and sell more abroad. This will create further imbalances in the World economy. But say China faces a serious inflation problem, China may try to curtail domestic demand - both consumption as well as investment demand, China's actual (not official) growth rate may fall. This may weaken China's demand for commodities in international markets. This may soften prices and may help other poor developing countries to grow faster.
We must be aware that Communist countries with full control of Party and no democracy, Recession of the type capitalist free economies suffer from, is almost impossible to happen. Only if there is serious revolt due to unemployment and low availasbility of food and clothing in rural areas, there could be disruptions that in case their military is unable to contain, China may suffer a big jolt. But if Chinese economy slows down, may poor developing countries will benefit.