No one can be strong when China is weak. That, at least, appeared to be the message from the economic data this week. New data suggest lacklustre growth in China – sparking nervous sell-offs in other countries. A one-day decline of over 7 per cent in the Nikkei stock market index might seem like an overreaction but, last year, China was Japan’s most important export destination, accounting for more than 18 per cent of its goods exports. China now accounts for one-quarter of South Korea’s exports. China is also the third-largest destination for US exports, after Mexico and Canada.
Stock market wobbles cannot be attributed to China alone. Ben Bernanke, Federal Reserve chairman, revealed that asset purchases associated with quantitative easing might be tapered earlier than investors expected, providing another reason for stock markets to lurch down. Meanwhile, rising bond yields in Japan have led to a new sense of unease: financial bets are no longer all one way.
The relationship between China and the rest of the world has changed significantly in recent years. Before the onset of the global financial crisis, China’s growth was heavily export-led and primarily driven by productivity-driven gains in competitiveness. Adjusted for inflation, exports rose between 20 and 30 per cent per year. Since the crisis, export momentum has faded rapidly. In 2012, exports rose a mere 6 per cent, held back in part by trauma in the eurozone. One consequence has been a remarkable reduction in China’s current account surplus, dropping from over 10 per cent of its gross domestic product in 2007 to 2.6 per cent last year.