Thread by @Brad_Setser

Yep.

From Paul Krugman's latest (and very good) summary of the risks China poses to the global economy

nytimes.com/2019/01/15/opi…

A couple of points of my own.

It is often argued that the China shock is in the past. But I still worry that China's external adjustment is fragile. If investment fell back to its 2007 level, that is a 5 percent of GDP swing; if it fell back to its 2000 level, 10 percent

Savings might adjust too, but a couple of percentage points swing in a $12 trillion plus economy still would have a big global impact.

A second China shock, from a Chinese slump rather than a Chinese boom, is quite possible ...

Second point, China's impact on global demand is very asymmetric. It is far more important to global commodity demand (and Asian tourism demand) than global manufacturing demand.

(note that trailing 12m sum of goods surplus is now heading up ... )

China's manufacturing surplus has been heading up the last year and a half or so, even as its overall surplus shrank (b/c of commodities)

China's imports of manufactures for its own use (e.g. net of processing) are around 5% of its GDP/ $600b.

For comparison, US imports of manufactures are just over 10% of US GDP/ $2 trillion, so three times as large. (& no more than a percent of those imports go into exports)

U.S. base is bigger, and growth in U.S. imports has been faster --

So for global manufacturing demand, the U.S. still matters far more

(for commodities it is the reverse)

The policy conclusion that I draw from this is that the risk of a second China shock still runs through exports (as a response to weak demand inside China, think of all the auto plants being used to meet global demand) and thus hinges critically on what happens to the currency

not everyone agrees tho ...