Up until now, there are two school of thoughts about how China's growth has been fueled over this decade.
1. Exports generate much of China's growth, as Brad Setser never fails to mention.
2. Domestic consumption has been the key driving force, as put forward by Jonathan Anderson, the Economist and others.
Which of these theories will lead China into the 21st Century? Now comes the truth.
China's trade surplus is slowing down, and playing a far less important role in China's growth potential than before. Although the country still produces a lot more exports than good/services for domestic consumption, reports suggest that China's exports actually contributed only 0.4% of China's GDP in the last quarter. That means the other 10.8% growth in GDP was attributed to increasing demand in domestic consumption.
This is good news for importers in China, and to everyone on this planet. As America's recession continues to linger, China may be the only (relatively) strong driving force in global economy in 2008. Moreover, the high growth in domestic consumption will help create a foundation of future growth in the Chinese economy such that China will become less and less reliant on the business cycles of its trading partners, namely the US, Japan and Europe. This is exactly what the US has been demanding over the past years, and everything is acting to defuse trade tensions between the countries.
Finally, a slowdown in exports may pull the country back from overheating, something that the Chinese government has been trying hard to achieve. What's not to like?
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