Home > News > 【Voice of Scholar】Prof. John Ross: China faces new international trends

【Voice of Scholar】Prof. John Ross: China faces new international trends

May 10, 2012      Author: John Ross

SIGNIFICANT changes are taking place in the world economy and also in European politics, as shown by the outcomes of the French and Greek elections. Both trends will inevitably interact with China's economic policy. But in order to understand their consequences for China's economy, it is important to understand the connection between them.

At a purely economic level, there is evidence of a new weakening of the global economy, which will clearly have negative consequences for China's exports. But the simultaneous decline in pressure from international price rises, due to the international economic slowdown, will help bring down China's inflation and create greater room for a domestic economic stimulus.

The connection between these two developments can be seen in the chart, which shows the year-on-year change in the international Dow Jones-UBS Spot Commodity Index. This is a general international commodity price index which has the advantage that it covers a wide range of products rather than concentrating simply on single important ones such as oil.

International commodity prices are an extremely sensitive indicator of world economic conditions and can be followed on a daily basis. The chart therefore clearly traces the changes in world economic conditions in the last five years and shows the significance of recent developments.

New weakening

But from the middle of 2011, commodity prices started to weaken and by the end of the year, they were actually falling. In December to March, there was a stabilization, but from mid-March onwards, there was new acceleration in the fall in commodity prices. This clearly indicated a new weakening of the global economy had begun.

Subsequently released data confirmed the trends indicated immediately by international commodity prices. Statistics for the first quarter of 2012 showed the US economy slowing to 2.2 percent annualized growth, compared to 3.0 percent in the last quarter of 2011. US jobs growth in April of 115,000 was weak. In Europe, two of its major economies, the UK and Spain, have moved back into a double-dip recession.

These international economic trends have clear implications for China. China's Consumer Price Index follows international commodity prices extremely closely - China's CPI is much more closely correlated with world commodity prices than it is with China's own domestic money supply.

Therefore, the new fall in global commodity prices should lead to a further decline in China's CPI, creating room for stimulating the domestic economy to counter the weakening export situation.

Turning to political developments in Europe, it is evident that these negative economic trends, which replaced earlier hopes of economic recovery, helped lead to the victory of Socialist Party candidate Francois Hollande in France's presidential election, to major gains for the Labour Party against the Conservatives in UK local elections, and to the spectacular rise of the anti-austerity Syriza (Coalition of the Radical Left) party to second place in Greece's legislative elections.

Closer relations

China naturally has a policy of seeking good relations with whichever government is in power in European countries. It has worked closely, for example, with the right of center Christian Democratic government of Germany led by Angela Merkel. But there is no doubt that parties which are winning European elections at present are likely to want even closer economic relations with China.

For example when French President Nicolas Sarkozy was elected, he pursued anti-China rhetoric, talking of boycotting the opening ceremony of the 2008 Beijing Olympics. Later, under the impact of the international financial crisis, he reversed his policy and tried to create good relations with China - for example personally meeting Chinese President Hu Jintao at the airport when he visited France. But this was forced on Sarkozy and contrary to his initial approach.

Hollande, having learnt from Sarkozy's mistakes, will want good relations with China from the beginning. In the Greek left, there are strong admirers of China's economic success. The leader of the British Labour Party Ed Miliband also wants good economic relations with China. In Ireland, the recent visit of China's Vice President Xi Jinping was warmly welcomed by all political parties.

This new international economic situation will certainly create some difficulties for China's exports to advanced economies and therefore will further shift the center of China's trade towards developing ones.

By March 2012, 55.7 percent of China's total trade was with developing countries, compared to 44.3 percent with advanced economies.

The majority of China's imports (59.4 percent) have long come from developing countries, but now the majority of China's exports (51.5 percent) also go to them. Therefore, China has bypassed the old model in which it was primarily a supplier of goods to the US and European markets and has instead become in the first place a powerhouse of trade with developing economies.

More stimulation

The implication of this combination of weakening in the international economy and its political consequences in Europe for China's economy are therefore rather easy to determine.

Weakening of export growth to advanced economies will be offset by continued growth of exports to developing economies and by falling inflation making possible more stimulation of China's domestic economy.

Meanwhile, the political shifts in Europe will produce closer relations between China and a continent which is still its single largest trading partner. From the point of view of strategic framework, weakness in China's exports to Europe is likely to be offset by increased opportunities for Chinese investment in Europe and by a wider range of economic cooperation.

Discussions of whether China will have a "hard landing" or a "soft landing" are somewhat misplaced. The changes in the international economy will, and not for the first time, significantly shift the parameters of China's economic growth. But there is nothing in the new global trends that should derail it.

John Ross is currently visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director for economic and business policy.

Source: Shanghai Daily