From Mark Spiegel at the Federal Reserve Bank of San Francisco:
The recent slowdown in China’s economic growth has caused a great deal of concern, particularly among global trade partners that export to China. On November 3, China’s President Xi Jinping announced that expected real GDP growth over the next five years would be no lower than 6.5%, which is one-half percentage point lower than the previous estimate. The industrial sector has been particularly weak as it has expanded by only 0.2% over the past year. In addition, imports to China continue to fall dramatically, as shown in Figure 1. Import values in October 2015 were almost 19% lower than they were in October of the previous year.
However, a number of analysts (for example, Lardy 2015) have argued that concern about the slowdown in the Chinese economy–and the associated reduction in Chinese imports–is overblown. Instead, they point to the resilience in the country’s service sector. This sector has indeed been a source of relative strength, with reported growth of 11.9% over the past four quarters.
In this Economic Letter, I show that the strength of China’s service sector is not likely to provide much support for gross exports from the rest of the world over the short term. The steep recent decline in China’s imports is consistent with the country’s growth pattern across different sectors. There has been a strong positive relationship between slower growth in gross imports and slower growth in industrial output over the past 15 years. However, imports and service outputs do not show a significant relationship. These results hold both for imports from non-commodity exporting advanced economies and for advanced and emerging market economies that export commodities to China. Therefore, from the rest of the world’s point of view, an increase in China’s service sector does not offset a similar magnitude decline in its industrial sector….