China’s Economic Weakness Revealed
Vice President of Strategic Analysis Rodger Baker explains how Europe’s debt crisis exposed the vulnerabilities inherent in the Chinese economic model.
The Chinese continue to watch the way in which the Europeans are trying to deal with their financial and political crisis right now. For China this is particularly important. Number one, Europe has become China’s largest export market and that has a major impact, of course, on the way in which the Chinese operate their economy. Number two is that a continued or an even deeper crisis in Europe could pull the entire global economy into recession.
Chinese exports to Europe and to much of the rest of the world saw a particularly sharp drop in 2009. This was something that the Chinese government had to rush to stabilize — they counteracted that dip in exports with a huge increase in domestic investment. The Chinese had hoped, during that time, that the Europeans would simply build themselves back up, pull themselves out of this particular crisis and that China would be able to continue with its fairly rapid expansion of exports to Europe to keep its economy chugging along as China headed towards its 2012 leadership transition.
Although Chinese exports to Europe picked up a little bit in 2010, the rate of growth that the Chinese had been seeing in the previous four or five years slowed down quite a bit. The problem for China is that as the pace of export growth slows, the pace of import growth doesn’t. The Chinese still need a very large amount of commodities. They’re importing these commodities, not only to feed their export market, but to feed all of this new domestic investment. And that means that while the Chinese may not be making as much selling, they are having to buy still a very high market prices to be able to develop internally.