When China’s government started to work on and implement its massive stimulus program in November last year in light of a rapid deterioration of the world economy, economists working on China had to work out what it all meant for China’s growth, the composition of growth, and the rest of the world.
Many foreign observers doubted that the stimulus would be effective enough to boost domestic demand in the first place. But even among those with higher expectations in this regard—like we at the World Bank—many wondered what the stimulus would mean for the rest of the world.
Usually, when one country grows much faster than other countries, we expect imports into that country to rise much faster than exports (or, fall much less). However, in the case of China, exports had for quite some time been outgrowing imports by a large margin and many were skeptical that this would change even as economic conditions were changing in a pronounced way.
- Some argued that the stimulus was by and large benefiting domestic firms, with very little impact on import demand. As external trade flows around the world were in a really bad shape at the end of 2008 and in early 2009, and destocking was further depressing China’s imports. This view was gaining ground for a while.
- In fact, this view held up longer than it should have, as “real” (volume) trade developments were masked by price changes. Raw materials import volumes were rising substantially since February but this was not recognized widely because imports in US dollar terms remained very weak due to sharp price declines (Figure 1).
- The recovery of raw material imports got momentum and was eventually recognized. But, manufacturing imports remained weak for longer. Many thought that this pattern was likely to remain, supported by either economic or political forces:
- It was argued, including by me, that import substitution and reorientation of sales from exports to domestic markets by China’s super competitive manufacturing sector could dampen the impact of demand on trade flows. Some even thought this offset could dominate the demand impact.
- Others put more emphasis on the likely impact of protectionism.
Now, 9 months later, it appears that imports of manufacturing products have recovered as well (figure 2). This is so even though processing imports—imports used in the Chinese part of the international production networks, where parts are typically assembled for re-export—are still suffering.
This means that “normal” imports (imports into China’s domestic economy) are stronger still than suggested by the overall import numbers. Indeed, using our own, crude estimates for prices of normal imports, we find that overall “normal” import volumes—used by China’s domestic economy—are already higher than a year ago (Figure 3).
In retrospect, it would have been odd for this not to happen. After all, China is a fairly open economy that is well integrated into the world economy. Moreover, the domestic demand strength we are currently witnessing is broader than just relying on infrastructure. Look for instance at currently soaring car sales and strong sales of white goods, other electric appliances, and mobile phones.
As others have observed, China’s domestic strength has become a major driving force of the recovery in several neighboring countries, including South Korea and Singapore.
To me, these developments are reassuring, both for the world economy and for standard economic theory (i.e., common sense).