China is sustaining relatively favorable economic performance despite the worsening financial crisis that originated in the United States. As a consequence, China is building on its growing economic presence by means of its rising contribution to the growth of the global economy; the scale of its trade and gross domestic product (GDP), which now rival those of Japan, the U.S. and Germany among first tier economies; and the amount of its foreign exchange reserves and U.S. Treasury bond holdings, which is now the highest in the world.

China to Contribute Approximately Half of Global Economic Growth in 2009

Following the 2008 downturn in the global economy, a further slowdown in 2009 is seen as inevitable given the continuing effects of the financial crisis, which originated in the U.S. According to an update to the World Economic Outlook released by the International Monetary Fund (IMF) in November 2008, Japan, the U.S. and the European Union are set to record negative growth in 2009. The Outlook also predicts a decline in the global economic growth from 3.7% in 2008 to 2.2% in 2009. In the meantime, China is set to sustain relatively high economic growth of 8.5% in 2009, despite continuing deceleration. Combined with the nation’s GDP that accounts for 12.0% of the world total on a purchasing-power-parity (PPP) basis, China’s contribution to the growth of the global economy amounts to 1.02% (8.5% of 12.0%), close to half the total growth forecast (2.20%). China’s contribution widely surpasses that of other major emerging nations such as India and Russia (Table 1).

Figure 1: Contribution to the rate of global economic growth by major countries and regions

(Source) IMF, World Economic Outlook Update, November 6, 2008

China as the World’s Largest Exporter and Third GDP Power

China's $1.22 trillion in exports were second only to Germany's $1.33 trillion in 2007. However, China’s exports continued to rise at a 20% annual growth rate and China eventually surpassed Germany to become the world's leading exporter in July 2008 (Figure 2).

In the meantime, according to IMF figures China’s 2007 GDP was $3.25 trillion, which ranked fourth in the world after the U.S. ($13.84 trillion), Japan ($4.38 trillion), and Germany ($3.32 trillion). The difference in GDP level was small between China and third-place Germany in 2007, and China looks set to overtake Germany in 2008 on the basis of relative growth rates, where China's forecast in excess of 9% is far above Germany's projected 1.7%; relative inflation rates, where the rate in China is also higher than the rate in Germany; and relative currency rates, where the Chinese yuan has been appreciating against the euro as well.

Figure 2: China’s exports overtook those of Germany, making it the world’s largest exporter

(Source) IMF, Federal Statistical Office of Germany and the Chinese Ministry of Commerce

World’s Largest Foreign Exchange Reserves and U.S. Treasury Bond Holdings

The size of China’s foreign exchange reserves surpassed the amount held by Japan to become the largest in the world in February 2006. The reserves continued increasing from that point to reach $1.9 trillion in September 2008. The amount is even higher if the $200 billion transferred to the China Investment Corp. (CIC) is included in the total. A considerable portion of these reserves are allocated to U.S. dollar-denominated assets, primarily U.S. Treasury bonds. In fact, according to statistics released by U.S. authorities, Chinese holdings of U.S. Treasury bonds reached $585 billion in September 2008, and exceeded the Japan's holdings for the first time (Figure 3).

Figure 3: China’s foreign exchange reserves and U.S. Treasury bond holdings exceed Japanese levels

(Note) Year-end values except for 2008, where September figures are used. (Source) U.S. Treasury Department and the State Administration of Foreign Exchange of China

The U.S. will require enormous government spending to stabilize its financial system and to stimulate economic growth. To cover this expenditure, the country will need to issue a huge volume of Treasury bonds. Whether China will continue to invest in U.S. Treasury bonds is becoming an increasingly important question that will impact both U.S. interest rates and foreign exchange rates.

From a Regional to a Global Economic Power

The balance of power in the global economy has been experiencing rapid changes as a result of the ongoing financial crisis that originated in the U.S. A decade ago, the Asian financial crisis triggered by the devaluation of the Thai baht in July 1997 caused the currencies and economic growth rates of neighboring nations, including Japan, to fall sharply. China, however, was able to sidestep the problem and sustain economic growth at an annual rate of 7% through expansionary fiscal policy measures. The 1997-1998 Asian financial crisis came to symbolize China's rise as a regional economic power. Ten years later, the latest crisis is causing damage not only to the U.S. at its epicenter, but also to other advanced regions, such as Japan and the European Union. If China successfully sustains high growth under these circumstances, the country’s position as a global economic power will become indisputable.

Postscript:
IMF has revised its projection for global GDP growth for 2009 downward to -1.3% in its April 2009 issue of World Economic Outlook. Although the forecast for China’s economic growth rate has also been cut to 6.5%, the country is still expected to contribute 0.8% to global GDP growth, meaning that should the Chinese economy stop growing, global economic growth would fall a further 0.8% to -2.1% in 2009. Meanwhile, China has revised its GDP figure for 2007 upward to surpass that of Germany.

Related articles:
"Impact of the U.S.-triggered financial crisis on China expected to be limited," China in Transition, October 29, 2008.

(December 25, 2008)