Yesterday Brad Setser challenged those who cling to the China decoupling thesis. In short, Setser suggested that China's growth continues to be export led, and that domestic demand is "actually weaker than it was in 2003 and 2004". The only change is that exports are more to Europe than to the US. Setser punctuates his argument with this graph from what he calls "an excellent November 12 paper by Goldman Sachs' Hong Liang":
China: GDP v. "Domestic Demand"
… China has decoupled to a degree from the US over the past two years. The US hasn't been the engine of demand growth globally over the past two years.The US hasn't been the engine of demand growth globally over the past two years. Net exports only subtracted 0.1% from US GDP in 2006, and they contributed 0.5-0.6% to US GDP in 07 [PDF, 14 pp.]. US import demand has slowed -- with real imports in 2007 growing more slowly than real consumption (in part due to the fall in residential investment). Europe, by contrast, has emerged as an engine of demand -- growing more rapidly than the US [$] . That has meant that China has shifted from relying on US demand to relying on European demand. Up until now, China has offset the slowdown in the pace of growth in its exports to the US with strong growth in its exports to other parts of the world.It will prove interesting to see how things play forward in China as the pretty-much-guaranteed US slowdown proceeds and as continuing financial disclosures threaten to worsen the ongoing financial meltdown.
For China to help support the global economy during a potentially rough period -- and for the world's imbalances to shrink on a sustained basis -- China needs to grow entirely on the basis of domestic demand.
P.S. By contrast, George Soros argues in favor of the Decoupling Thesis, in The Sixty-Year Storm, while maintaining that the upcoming day of reckoning for the US will be long and deep as a sixty year cycle of euphoria unwinds.