Consensus boredom breeds economic data hype
Print Edition
THIS year has already seen a great deal of attention paid to Chinese data, which have caused considerable volatility in financial markets. This interest may be out of proportion to the actual importance of the Chinese economy.
There has been a remarkably strong consensus about the global economic outlook this year. A widely held consensus is boring, so investors are looking for anything that might differentiate their strategy. Chinese data have been one of the main sources of surprise to markets this year, and thus have been seized upon by sensation-starved investors.
In addition to satisfying the search for novelty, headline data in China have been dramatic. A good example is February’s decline of over 18 percent in Chinese exports. Superficial analysis would suggest that this is a dramatic economic development. However, Chinese data have been subject to a number of distortions of late.
The Lunar New Year distortion is well known, but there are also what economists call “base effects” to take into account. If these distortions are swept aside, China’s exports probably rose 5 percent, slightly less than the 7.5 percent growth at the end of 2013.
This attention focused on China is unlikely to disappear any time soon. In fact, as US weather distortions are removed from US data, it is likely that economic consensus will establish itself even more firmly. This will add urgency to investors’ search for something sensational. If Chinese economic performance is going to be attracting more attention, how does China’s economy really translate through to the rest of the world?
Looking at the detail of Chinese trade data reveals that what matters most to the Chinese economy is United States performance. Indeed, China’s exports to the US amount to 5.6 percent of Chinese GDP. This is significant. The US is more important to China than Japan, Germany, the UK and France combined.
The importance of the US suggests that the moderation in China’s export data simply reflects bad winter weather in the US and not some global economic slowdown.
There have also been concerns about China’s domestic economy. There has been some evidence of moderation in construction activity, for instance, raising concern about countries that export to China. However, much of what is exported to China spends a relatively short period of time there before being processed, packaged and re-exported elsewhere. If China’s domestic demand weakens, it is only the exports to China that normally stay in China that will be vulnerable.
For a country to be affected by volatility in Chinese domestic activity, an economy will need to be relatively export focused or be selling the sort of product that China purchases for its own consumption. The latter group are mainly commodity exporters. Saudi Arabia makes almost 5 percent of its GDP by selling oil to China, and Brunei and Chile have over 3 percent of their economies exposed. Only around 2 percent of the Australian economy is dependent on domestic Chinese demand, which is only slightly more than Indonesia’s exposure to China.
Other Asian economies tied to Chinese domestic activity are significant traders. Taiwan has over 5 percent of its economy dependent on mainland domestic demand. Malaysia is not far behind, and Singapore has almost 4 percent of its economy resting on Chinese activity. South Korea, Thailand and Hong Kong all hover around 3.5 percent. These are meaningful but not overwhelming numbers.
What is noticeable is that the US is largely indifferent to Chinese economic activity — little more than 0.4 percent of the US economy relies on Chinese domestic demand. Europe is similarly indifferent, with under 0.7 percent exposure. The trans-Atlantic economy simply does not sell that much in China and will be relatively unaffected by Chinese domestic economic performance.
China, with its volatile data, is a prime candidate for exaggerated attention. Investors need to keep a level head and consider what China really means for the world economy before being seduced by the short-term volatility and hype that surround China’s growth this year.
Editor’s note: This article was written prior to the release of March trade figures, which showed exports fell 6.6 percent from a year before and imports plunged 11.3 percent.
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