The basic idea behind the "decoupling theory" is that European and Asian economies, especially emerging ones, have broadened and deepened to the point where they no longer depend on the United States for growth.
The basic idea behind the “decoupling theory” is that European and Asian economies, especially emerging ones, have broadened and deepened to the point where they no longer depend on the United States for growth, leaving them insulated from a severe slowdown in the U.S. economy, even during a full-fledged recession. It seems unimaginable that the world can possibly disregard the U.S. markets altogether, especially since globalization has increasingly brought the world’s economies closer together in one large, interdependent web. However, for certain emerging markets such as China, there may be some support behind the decoupling theory , which if proven true, could mean that the the effects of a U.S.-led economic recession may be much less drastic for China today versus even 8 years ago (2001 recession in the US).
There are a few significant reasons that explain how the decoupling theory might apply to China. First, China’s dependency on U.S. exports is only 8% of its GDP altogether. And if one takes into account the fact that that the goods exported to the U.S. are not luxury items but rather “essentials” that people will continue to buy even in financially trying times, this dependency on U.S. exports diminishes even more. Secondly, who said that the U.S. is the only country that is in need of Chinese products? Emerging economies such as Brasil, India and Russia do not only trade with the rich nations; they also trade with one another. According to a recent report cited by The Economist, exports to Brazil, India and Russia were up by more than 60%, and those to oil exporters by 45%. In fact, approximately half of China's exports now go to these non-U.S. emerging economies. (source)
Another important factor to consider is that China has its own rapidly growing consumer market. “In China… middle class families (with annual income of $25,000+) constitute about 130 million people and economists expect that another 40 million will be joining them in the next decade.” This expanding middle class creates growing domestic demand, both in consumer spending and investment, which independently boosts China’s economy, making it less vulnerable to temporary downturns in the U.S. market. This argument is also supported by to Jonathan Anderson, one of the leading UBS economists, who believes that China’s growth is increasingly domestically led. (source) There is also the possibility that investors, now seeing the struggling U.S. market, will decide to reallocate their investments into China’s capital markets.
Even if the effects of U.S. recession roll over into China, China’s growth rate will still outperform the U.S. and most Western economies. Jim Rogers, a veteran investor and co-founder of the Quantum Fund (who predicted the 1999 commodities rally and today is predicting “ the worst recession we had since World War II”) displays confidence when it comes to China’s markets: “I am still bullish about surging Chinese stock markets despite worries over [the Chinese equities bubble]. I do not want to sell Chinese stocks. I want to own them forever and I want my four year-old daughter to own them." (source) While it is indisputable that forces of globalization are bringing the world’s economies closer together, the decoupling theory appears to be pulling at the other end of these globalization forces, particularly in the case of China, as it continues to establish a more independent economy.
