The world’s monetary policy elite is gathering in Jackson Hole, Wyoming for their annual symposium. Federal Reserve Chairman Ben Bernanke is topping the bill and is expected to confirm a downbeat outlook for the U.S. and world economy. China is not normally well represented at the meeting and the expectation this year is that no one from China will appear on the roster of speakers.

But present or not, China won’t escape the implications of the gathering gloom. With prospects for growth in the U.S. and Europe increasingly shaky, investment banks have been rushing to downgrade their forecasts for growth in China.

Downgrading Growth

Ma Jun at Deutsche Bank sums up the reason for the move to downgrade: “We believe that in the near term, the single most important shock to the Chinese economy will be the likely slowdown (or even recession) of the EU and US economies.” Deutsche Bank has downgraded its China growth forecast for 2011 to 8.9% from 9.1%, and for 2012 to 8.3% from 8.6%.

“Much weaker growth prospects in developed economies” have also prompted Wang Tao at UBS to lower forecasts for growth in China to 9% from 9.3% in 2011, with a sharper drop to 8.3% from 9% in 2012.

The path from lower growth in the U.S. and Europe to lower growth in China lies through exports. Mr. Ma explains: “The key transmission mechanism is that for each 1 percentage point slowdown in EU/US growth, China’s export growth slows by about 6-7 percentage points… which in turn should reduce China’s GDP growth by 1 percentage points, including the ripple effect on investment slowdown in related sectors.”

With politicians in the U.S. lambasting China’s exporters as the source of all their woes, it might be expected that the impact would be greater. In fact, the share of exports in China’s GDP dipped from 35% in 2007 to 27% in 2010.

Even that 27% figure overstates the importance of exports to China’s growth. That’s because a large part of China’s exports are composed of parts imported from other Asian countries. Lu Ting, China economist at Bank of America Merrill Lynch explains:

“Domestic value added, which strips out the imported components from exports, accounts for about half of headline value of exports in China. This means that the true weight of exports in China’s GDP could decline from 17.5% in 2007 to 12.5% in 2011.”

From Construction to Consumption?

Fears of a global slowdown have reinforced the belief among many economists that China’s inflation has peaked, and that opens up room for a shift in policy to support growth. But expectations for a second stimulus are muted. “Further monetary tightening is unlikely, so is policy reversal,” says Citi’s Shen Minggao.

If there is an easing of policy it is likely to come through increased public spending rather than a rolling back of monetary tightening. Mr. Shen says: “The current budget envisages a deficit of about 2% of GDP, and up to July the general government achieved a surplus of over 3% of GDP. This would allow a significant spending capacity for the rest of the year if a proactive fiscal policy stance is fully implemented.”

In other words, in contrast to governments in the U.S. and Europe, China’s tight-fisted rulers have been taxing more than they spend. If Beijing turns that around and spends more than it taxes, the government can support growth in the closing months of the year.

A second stimulus would likely work by supporting consumption rather than boosting investment. That choice to favor consumption has its drawbacks because investment spending has a bigger and more immediate payback in boosting growth. Deutsche’s Ma Jun does the math: “Every RMB1 that is spent by the government on investment, it boosts GDP by RMB1.4 almost instantly; but for every RMB1 transferred by the government to households, it only increases GDP by RMB0.4, and with a time lag.”

But with diminishing returns to further investment, the rail crash raising concerns about the safety of major infrastructure projects, and the banks’ capacity to support another lending binge limited, China might have little choice but to turn from construction to consumption as the driver of growth.

If consumers in the U.S. and Europe take another battering, it might be Chinese households’ time to shine.

– Tom Orlik

Cumulative appreciation of the renminbi against the US dollar since the end of the dollar peg was more than 20% by late 2008, but the exchange rate has remained virtually pegged since the onset of the global financial crisis.

Deterioration in the environment – notably air pollution, soil erosion, and the steady fall of the water table, especially in the north – is another long-term problem.

China is the world’s fastest-growing major economy, with an average growth rate of 10% for the past 30 years.

Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector and that the extent at which China is dependent on exports is exaggerated.

The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70 percent of the labor force and produce more than 60 percent of GDP.

A report by UBS in 2009 concluded that China has experienced total factor productivity growth of 4 per cent per year since 1990, one of the fastest improvements in world economic history.

The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship, whilst retaining state domination of the economy.

The growth in both outbound investment from, and inbound investment to, China reflects the nation’s rising economic power and attractiveness as an investment destination.

In this period the average annual growth rate stood at more than 50 percent.

China reiterated the nation’s goals for the next decade – increasing market share of pure-electric and plug-in electric autos, building world-competitive auto makers and parts manufacturers in the energy-efficient auto sector as well as raising fuel-efficiency to world levels.

Although China is still a developing country with a relatively low per capita income, it has experienced tremendous economic growth since the late 1970s.

Since the late 1970s, China has decollectivized agriculture, yielding tremendous gains in production.

China is the world’s largest producer of rice and wheat and a major producer of sweet potatoes, sorghum, millet, barley, peanuts, corn, soybeans, and potatoes.

China ranks first in world production of red meat (including beef, veal, mutton, lamb, and pork).

Oil fields discovered in the 1960s and after made China a net exporter, and by the early 1990s, China was the world’s fifth-ranked oil producer.

There are large deposits of uranium in the northwest, especially in Xinjiang; there are also mines in Jiangxi and Guangdong provs.

In the 1990s a program of share-holding and greater market orientation went into effect; however, state enterprises continue to dominate many key industries in China’s socialist market economy.

Since the 1980s China has undertaken a major highway construction program.

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China Avoids Jackson, But Not Gathering Economic Gloom