China’s biggest fall in exports in two years is bad news for all of us – and this is why

The global superpower’s fragility will be an increasingly unsettling feature of the world economy for the years to come

We should get used to looking to China for guidance on the state of the global economy (AFP/Getty)

The place to watch if you want to know what is going on with the world economy is not so much America, but China.

We are not used to this. In the past, the big swings in economic growth have started in the US, and of course it still massively important. But right now China is more volatile.

Think of it this way. If you are a German car manufacturer you may be a bit worried by Brexit, and tariffs on sales to the US would be a nightmare. But the thing that would really keep you awake at night would be something else: a collapse of car sales in China.

Volkswagen sells around 200,000 of its cars in the UK and 600,000 in the US – but more than 4 million in China. However, last year, for the first time since 1990s, total car sales there fell despite the economy growing officially at about 6.5 per cent. So the possibility now of a slowdown there is troubling indeed.

The expectation is for what is called a “growth recession” – not a recession as such, which is technically when there are two successive quarters when the economy shrinks, but rather a sudden slowing of growth.

That seems already to have happened. The official figures for the final quarter come out on Friday, but you have to take these with a pinch of salt. Private calculations suggest this have almost ground to a halt.

Ken Rogoff, professor at Harvard and former chief economist at the IMF, thinks a growth recession may already be happening, and the London-based boutique consultancy Enodo Economics calculates third-quarter growth at less than 1 per cent annual rate.

This slowdown is affecting the rest of southeast Asia, so growth in the regional countries – all of which export to China – has been hit. This is a vibrant region and will be fine in the end. But what happens in China has a direct impact because a higher proportion of the exports of, say, Indonesia go to China than the exports of, say, Germany.

So, what has gone wrong in China? In a nutshell, it is finding it hard to make the transition from export-led and investment-driven growth to a domestic and consumption-led economy.

It cannot rely so much on exports because this creates political pressures against it (witness President Trump’s attack) and it cannot rely on investment (much of it in private property) because it has over-built.

A such, there is a large volume of debt that borrowers are struggling to service, and a wobbly banking system.

The Chinese authorities are, of course, aware of all this, and are very competent. But treading the fine line between squeezing out bad debts and tanking the economy is tricky.

China and emerging Asia account for about 40 per cent of world GDP at market exchange rates.

Charles Dumas at TS Lombard writes: “The global slowdown seems to have started in mid-2018, and shows the now decisive importance of emerging markets to the world economy.”

I think that is right. The trade war has made matters worse, and of course may make matters worse still. But a truce with China (which Donald Trump needs for domestic political reasons) would help a lot.

China’s fragility will be an increasingly unsettling feature of the world economy for the years to come, however, and when it becomes the world’s largest economy it will be the dominant feature.

Will there be a recession in 2020? Not really, or at least not a deep one – but the place to look for guidance as to what might happen will be Asia as much as America.