Figures understate China’s importance

This is my comment from this week’s Fund Strategy.

Despite the changes in recent years the West has yet to fully grasp the importance of China in the world economy. Although it is seen as immensely more influential than it was a decade ago it is still not studied sufficiently closely.

The headline figures understate China’s importance. Taking GDP at current prices – the best way to compare the sizes of different economies – the American economy is almost three times the size of China. According to forecasts from the International Monetary Fund (IMF) America’s GDP will be about $14 trillion (£8 trillion) this year compared with $4.8 trillion for China.

In addition, the Chinese economy is still slightly smaller than that of Japan, with a GDP forecast to be about $5 trillion this year. Indeed it is true that the importance of Japan in the world economy is also underestimated.

However, there are at least two reasons why these figures understate China’s centrality to the global economy. First, China contributes an enormous proportion of the growth in the world economy. China looks set to grow by about 7.5% this year according to the IMF compared with 1.5% for the developing world as a whole. The output of the advanced economies is expected to fall by 3.8%.

Second, because of China’s role in the system of global economic imbalances (see last week’s Fund Strategy cover story). Contrary to the common prejudice it is Chinese production, rather than American consumption, that has been the engine of the world economy in recent years. Without China’s strong growth the global economy would have suffered an earlier and deeper economic slowdown.

China’s role has become even more important now that the world has entered recession. Chinese growth is playing an important role in the stabilisation and recovery of the world economy.

However, whether China can continue to drive forward its growth at such a rate is open to question. Many commentators argue it can but others insist that it cannot be sustained.

Whether China can maintain economic growth at a rapid rate over the coming years is a question of the utmost importance for the world economy. It is one to which Fund Strategy will return in the coming weeks.