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Monday, June 27, 2016

Brexit aftermath: The West’s decline and China’s rise

The Brookings Institution
David Dollar | June 27, 2016

Brexit aftermath: The West’s decline and China’s rise

Brexit has little direct effect on the Chinese economy though it does increase the risk of financial volatility. In the long run it is hard to see it as anything but a plus for China as the West continues to decline and China continues to rise.
In the immediate aftermath of the Brexit vote, stock markets all over the world tanked. The interesting exception was China: The Shanghai market fell 1 percent on Friday and then more than recovered it on Monday. In the short run, Brexit is a modest negative as Europe’s gross domestic product (GDP) and trade are likely to grow less rapidly, and the EU is China’s largest trading partner. But the Chinese economy is simply not that export-oriented anymore. In the aftermath of the global financial crisis, the contribution of net exports to China’s GDP growth has averaged around zero. China initially made up for lost external demand with a massive stimulus program aimed at investment. This has now led to excessive capacity in real estate, manufacturing, and infrastructure. As a result, investment growth is slowing (see figure below). But China’s GDP growth has held up well because consumption is now the main source of demand. It consistently delivers more than 4 percentage points of GDP growth and its contribution has been on an upward trend.

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