China’s Growth Prospects & ‘Greece-Proofing’

As the world’s second largest economy, with expected trade in the amount of USD $4.8 billion by 2015, China’s stability and economic prosperity factor into most any global economic calculation. And as has been the case since the formation of its “going-out strategy” in the 1990s, China’s external relations continue to be shaped by domestic considerations, including the likelihood of slowing GDP growth over the next few years associated with an overhaul of China’s development model. With this in mind, one might envision three distinct scenarios for China-Latin America relations over the next decade and beyond. 

1. The first, which has been popular in Latin American media, involves a dramatic slowing of Chinese growth over the next decade and a related decline in Chinese demand for Latin American commodities. Growth as low as 3 percent by the end of the decade, as predicted by Michael Pettis and others, would mean economic disaster on a global scale. In Latin America, it would deal a catastrophic blow to major commodities exporters, to regional prosperity more broadly, and to burgeoning China-Latin America relations. A drop in Chinese growth of only 1 percentage point is associated with an approximate 2 percent decline in the growth of commodities prices, according to reports from several financial institutions.

2. The second scenario envisions China-Latin America relations progressing much as they have over the past decade, with engagement based predominantly on existing trade complementarities. This scenario assumes continued high rates of economic growth in China and corresponding high levels of demand for raw materials and agricultural commodities. It is based on an assumption that China’s demand for non-agricultural commodities will remain high, spurred on by resource-intensive infrastructure, industrial sector, and affordable housing programs specified in China’s 12th Five-Year Plan. Goldman Sachs has adopted a bullish outlook for both China and industrial commodities based on China’s massive urbanization efforts and Beijing’s continued focus on affordable housing construction.

3. A third scenario – and one that is favored by most economists and major financial institutions – assumes a slight decrease in China’s GDP growth in 2012 to around 7.5 percent as China promotes consumption-driven economic growth over its current investment-heavy model. Slowing of this nature has been expected for some time now. China’s leaders alerted the Chinese public to the prospect of slowing growth China’s 2011 and 2012 Government Work Reports. By most all accounts, a near 1 percent decline in China’s GDP growth rate over the course of the year still implies fairly high rates of demand for certain Latin American commodities, albeit at lower levels than we’ve seen in previous years.
 
One of the many unknowns, of course, is the impact that a Eurozone crisis would have on China, on its economic relations with other regions, and on the global economy in general. In a paper recently published by the Chinese Academy of Social Sciences (CASS) Research Center for International Finance, CASS Institute of World Economics and Politics Director Yu Yongding considers the effect of a ‘Grexit’ on the Chinese economy and some thoughts on ‘Greece-proofing’ China.