Chinese economy a prime candidate for exaggerated attention

This year has already seen a great deal of attention being paid to Chinese data, which have already caused considerable volatility in the financial markets. This interest in China may be out of proportion to the actual importance of the Chinese economy.

There are two reasons why China’s data have been emphasised by investors. There has been a remarkably strong consensus around the global economic outlook this year. The idea of a good US recovery, a mediocre euro-zone recovery and stable but more export-led Asian growth is firmly established. A widely held consensus is boring, and investors are looking for anything that might differentiate their strategy. Chinese data have been among the main surprises for markets this year, seized on by sensation-starved investors.

Headline data in China have been dramatic. A good example was February’s decline in Chinese exports of more than 18%. Superficial analysis would suggest this is a dramatic economic development. However, Chinese data have been subject to a number of distortions of late. The lunar New Year distortion is well known, but there are also what economists call base effects to take into account.

If these distortions are all cleared away, China’s exports probably rose around 5%, slightly less than the 7.5% growth at the end of 2013. Of course, a 5% increase is less likely to make headlines than an 18% decline, and so more attention is given to the more dramatic reported figure — and thus China assumes more importance in the global economy.

The attention given to China is unlikely to disappear any time soon. In fact, as US weather distortions are removed from American data, it is likely the economic consensus will establish itself even more firmly. This will added urgency to investors’ search for something sensational. If China's economic performance is going to be attracting more attention, how does its economy really translate to the rest of the world?

China’s distortion-adjusted export numbers tell us something about the world economy, but not that much. Looking at the detail of Chinese trade data reveals that what matters most to the Chinese economy is US performance. Indeed, China’s exports to the US amount to 5.6% of its gross domestic product (GDP). This is significant — the US is more important than Japan, Germany, Britain and France combined. The importance of the US suggests that the moderation in China’s export data is just reflecting the bad winter weather, and not some global economic slowdown.

There have also been concerns about China’s domestic economy. There has been some evidence of moderation in construction activity, for instance, raising concerns about countries that export to China. However, much of what is exported to China spends a relatively short time there before being processed, packaged and re-exported elsewhere in the world. If China’s domestic demand weakens, only the exports to China that normally stay in China will be vulnerable.

For a country to be affected by volatility in Chinese domestic activity, the economy will need to be relatively export-focused or to be selling the sort of product that China purchases for its own consumption. The latter group are mainly commodity exporters. Saudi Arabia makes almost 5% of its GDP through selling oil to China, while Brunei and Chile have more than 3% of their economies exposed.

Australia, which is often treated as being dependent on Chinese demand, does have exposure. However, only around 2% of the Australian economy is dependent on domestic Chinese demand, which is only slightly more than Indonesia’s exposure to China.

The other economies tied to Chinese domestic activity are Asian economies that are significant traders. Taiwan has more than 5% of its economy dependent on mainland domestic demand. Malaysia is not far behind, and Singapore has almost 4% of its economy resting on Chinese activity. South Korea, Thailand and Hong Kong all hover around 3.5% economic exposure.

What is noticeable is that the US is largely indifferent to Chinese economic activity — little more than 0.4% of the US economy cares about Chinese domestic demand. Europe is similarly indifferent, with under 0.7% exposure. The transatlantic economy simply does not sell that much in China and will be relatively unaffected by Chinese domestic economic performance.

A consensus world is a boring world, and any scrap of a surprise is likely to be sensationalised this year. China, with its volatile data, is a prime candidate for exaggerated attention. Investors need to keep a level head and consider what China really means for the world economy before being seduced by the short-term volatility and hype that surrounds China’s growth this year.