Home > Uncategorized > Developing Asia: The growing divergence between China and the rest

Developing Asia: The growing divergence between China and the rest

fromC. P Chandrasekhar and Jayati Ghosh

The past year has brought into sharp relief the significant differences between China and the rest of the world. The experience of the pandemic is probably the most extreme and definitive expression of that: the ability of China to contain the spread of the virus and prevent a renewed outbreak of any substantive nature is unmatched by almost all other countries, with the exception of a few outliers. The reasons for this certainly deserve separate study, but what is also worth noting is how this has also been associated with a relatively rapid recovery of the Chinese economy from the decline of the first quarter of 2020 to relatively rapid growth once again. This is contrary to almost every other major economy.

The differences are particularly marked with the rest of developing Asia, which until recently reflected similar tendencies as China, often precisely because the rest of the region was benefiting from the increasingly close and dense trade and investment links with that economy. But ever since the trade war with the US, which forced China to shift to greater reliance on domestic demand, and certainly since the Covid-19 pandemic struck, there has been growing divergence between China and the rest of developing Asia, particularly those economies (often clubbed as “Emerging Asia”) that are more integrated with global capital markets.

While there are significant differences amongst these countries, it may be that the differences between China and this group outweigh the differences within the group (with the exception of Vietnam, which appears to be following a trajectory closer to that of China). This divergence has actually been evident for some time now in terms of the global impact of the region. The latest World Economic Outlook of the IMF, released a few weeks ago, provides evidence of this.

Figure 1 presents the current account balances of China and the rest of the region, as shares of global GDP. For the past fifteen years, as China has been running very significant current account surpluses, the rest of developing Asia has been mostly in deficit, even though these have been relatively small deficits in the aggregate. (All figures are based on data from the IMF’s World Economic Outlook October 2020 database.) Effectively, China has been sucking in global demand, while the rest of the region has been adding to demand in the net. However, their smaller aggregate deficit has not been sufficient to outweigh that impact. The recent emergence of the rest of the region into current account surplus is essentially a reflection of the collapse in imports because of declining domestic demand as a consequence of the pandemic and lockdowns, mirrored in falling world trade.

Figure 1: China’s current account surplus has shrunk but remains
large relative to the current account balance of the rest of the Asian region

Figure 2: China’s international investment position is hugely positive,
compared to negative position in the rest of the region

A similar point can be made about international investment positions, shown in Figure 2. Throughout the period, and especially after the Global Financial Crisis, China’s net international investment position has remained strongly positive, growing to nearly 3 per cent of world GDP, while the rest of developing or “emerging” Asia together continues to have a negative net position. China, which was seen as a beneficiary of export-oriented foreign investment in the past, is now an important driver of investment and growth in the rest of the world. The rest of Asia as a group, on the other hand, still remains reliant on foreign investment, real and financial. If geopolitical factors limit China’s access to investment targets in some foreign locations, this can make a difference to the geographical distribution of global growth.

The pandemic has accelerated these tendences, not least because of China’s ability to cope with the virus and the apparent resilience and recovery of its economy. In addition it has disrupted regional supply chains, thereby cutting some of the links between China and her Asian neighbours, even as border tensions have increased. Stock markets are never the best indicators of the health of an economy, but they do provide some idea of how investors view the current state and possible future trajectory.  Further, governments everywhere are obsessed with stock market performance, seeing it (falsely) as a sign of economic success and a referendum on their economic policies. Therefore governments typically do whatever they can to bolster it.  Figure 3 shows that since the beginning of 2020, China’s stock market index first fell and then recovered to scale heights well beyond those since the start of 2019. By contrast, the average stock market performance of the rest of the region showed a much greater slump during the Covid-19 spread, and despite some recent increase, were still around ten percentage points below the value at the start of the year.

Figure 3: China’s stock market rises again while those
of the rest of emerging Asia languish

Figure 4: Real effective exchange rates have changed
for different reasons across the region

Now that the pandemic is refusing to recede in some large countries like India and showing signs of resurgence of infections in other countries, this is likely to affect stock market behaviour as well, so that this differential performance across China and other developing Asian countries is likely to widen.

Real exchange rates can partially neutralise what seem to be a loss of competitiveness. But they too show differential trends across Asian countries. In China, as expected, the recent appreciation reflects the renewed increase in current account surpluses after a period of decline, which counterbalanced the recent net capital outflows. But this does not help India as much as it may benefit some other Asian countries. In India both current and capital account deficits were sought to be counterbalanced by open market operations of the central bank to prevent disorderly depreciation, but the nominal exchange rate nevertheless depreciated. The real exchange rate, however, appreciated in the recent period essentially because inflation rates were higher than in India’s trading partners. As compared to this, in Indonesia and Thailand there have been fairly significant real devaluations.

Covid-19 is drawing a sharp wedge not only between China and the rest of the world, but also between China and its hinterland. It is yet to be seen how this will play out both geopolitically and in economic terms.

(This article was originally published in the Business Line on November 3, 2020)

  1. Econoclast
    November 12, 2020 at 4:17 pm

    From this article: “also worth noting is how this has also been associated with a relatively rapid recovery of the Chinese economy from the decline of the first quarter of 2020 to relatively rapid growth once again”
    “China … is now an important driver of investment and growth in the rest of the world”

    Why do so many economists who are critical of the orthodoxy, some of whom grace these pages, write about economic growth as if it was a good thing?
    I realize growth is the core belief of the orthodoxy, but why do not critics see it as the fraud that it is, the chimera that is driving us to doom?

    Have so many become true believers in spite of themselves?

  2. Ikonoclast
    November 13, 2020 at 3:24 am

    The analysis is interesting but it is mainly about the financial economy not the real economy. As the article itself says, ” Stock markets are never the best indicators of the health of an economy…”. Indeed, what investors think is a poor predictor of the future if investors are largely not looking far enough ahead or deeply enough to consider factors like climate change, limits to growth, political economy, geostrategy risks and either more pandemics or else a surprisingly long continuation of this one. These factors all indicate that China and the world are in for a very unstable time, including eventually de-growth of the real economy and even, very possibly, uneven regional collapses. We have entered the age of consequences as it is sometimes termed.

    China is certainly ascendant now. Its economy is clearly the largest in the world on the PPP measure; the measure that matters the most. China’s real production dwarfs that of every other nation on earth, the USA included. China’s cement production is massively larger than that of any other country on earth.


    China’s steel production is massively larger than that of any other country on earth.


    China’s car production is massively larger than that of any other country on earth.


    China’s makes more commercial vehicles than any nation on earth. China is one of the biggest truck and heavy machinery manufacturers. China exports massively more computers than any other nation on earth. This does not necessarily equate to more production. Japan, USA and China dominate supercomputer manufacture. Currently claims are that China now builds the world’s most powerful supercomputers.

    The overall picture even from this summary is that China is, far and away, the greatest single nation economic power on earth. The West is deluding itself it it thinks it is even in the same game except when taken as a bloc, that is US and EU taken together. Even there, China surpasses in many respects. This is balance-of-power altering stuff. The West is in precipitous decline though this still could be arrested. China has far surpassed the West in dealing with the COVID-19 pandemic. This illustrates China’s political economy competence and the West’s now egregious political economy incompetence. The geostrategic implications are profound. It will now take the entire rest of the world to counterbalance China plus the Shanghai Cooperation Organization countries. This is assuming India as part of the rest of the world and nt part of the S.C.O. Only an alliance of that scale can match China. Does China have to be matched? Well certainly, unless we are prepared to accept unilateral world leadership from China.

    The final issue is that climate change and limits to growth will bring many nations and regions down in the next 30 years. A real collapse, not just a mere financial collapse, is certain to happen. The questions are which regions will be affected worst and whether any regions will be left which are still relatively functional. The worst assumption to make from now on is that growth and business as usual can continue. They simply cannot. The civilizational world will be unrecognizable by 2050 and very possibly non-existent except as decaying wreckage.

    The best assumption is that we have to change everything to survive. This will mean ditching capitalism for a statism of democratic socialism and also ending wasteful consumerism. Either that or the remnant of humanity will have to go back to catabolic scavenging for survival and/or hunter gathering; all in a much despoiled world that will support relatively little macro animal life bigger than a rat on land and a jelly-fish in the sea. The future is easily this bleak and provably so by scientific analysis in the climate change and limits to growth fields.

    People need to stop being delusional about the illusory endless cornucopia of capitalism. The Götterdämmerung, the Ragnarök is upon us but it has nothing to do with gods or anything god-like other than man’s hubristic assumption that he could become as a god himself and transcend the natural world and its naturall limits. But that is physically and biologically possible so here we are at the end of all things, the anthropocalypse of our own making.

    • Ikonoclast
      November 13, 2020 at 3:43 am

      Oops, I left a “thesis-antithesis” pairing unresolved above in what was a rather fuzzy and shifting rant on my part. But the central dialectical logic is there.

      Thesis: Great powers are locked in a geostrategic struggle which condemns them to seek to outgrow rivals demographically, economically, technologically and militarily.

      Antithesis: This competition places them at odds with global limits to growth as well as threatening total war (mutually assured destruction).

      Synthesis: The only solution is a suspension of great power rivalry and a suspension of quantitative growth. The great powers and middle powers need to come together, presumably in a U.N. setting, and agree to a world treaty setting geostrategic limits for each major nation and setting up a shared framework for tackling oven-production, over-consumption and sustainability. Without an agreed global framework, we are certainly doomed.

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