That was just over five years ago. It is very clear shortly after the relative performance of the Chinese industrial structure started to bifurcate with tertiary industry (services) maintaining a strong growth rate whilst secondary industry (investment and production aligned sectors) started to slow.
With a lag of around one to two years, Asian Trade started to slow in step, before falling into a dramatic contraction over 2015 and thus far into 2016.
If relative rates of growth of the tertiary and secondary sector are maintained, than in a similar period of five years, services will be a larger component of the Chinese economy than industry.
That is to say, China will have engineered a deindustrialisation in the space of just five years.
This is a dynamic unprecedented globally but in the Chinese context business as usual (if fundamentally re-engineering the economic model can be called business).
There are many causal factors behind Asia’s trade recession, some cyclical, some structural, some related to globalisation, but developments in China seem to be at the nexus of all explanations.
During this reengineering and rebalancing the Chinese economy finds itself in what economists refer to as a disequilibrium position.
It is this transition away from the old industrial/investment led model that was so heavily reliant on the rest of the world that has caused global trade and commodity prices to swoon.
The impact on Asia of this disequilibrium has been as profound as it is unprecedented. Never has Asia experienced a retrenchment in trade of the extent, duration, breadth and depth that it is now experiencing.
Though the disequilibrium is having extremely disruptive impacts, it can be explained relatively simply. The supply side of the Chinese economy is increasingly becoming a services one, requiring the demand side of the Chinese economy to be a consumption-led one, not an investment-led one.
The Asian Trade Recession is evidence of the sharp decline in the contributions to growth from both industry and investment, hence the type of goods (components and capital goods) Asia has provided to China are no longer required.
However, though a rebalancing to services and consumption is evident, at this time it is not sufficient to offset the decline in industry and investment.
As long as China’s consumption demand (particularly for services) can be met from domestic supply, China’s call on the rest of the region is likely to remain low. Hence, our intuition is China will remain a significant contributor to the regional trade recession for the foreseeable future.
A TALE OF TWO ECONOMIES
The breadth and depth of China’s hold on the rest of Asia is illustrated by considering two economies at opposite ends of the value-added spectrum. South Korea is an exporter of high-value added capital goods such as semi-conductor foundries. Indonesia is an exporter of lower value added raw commodities.