The year of the Ox has ushered in an unwelcome truth for China and Australia – both economies are not going to escape the deepening global financial crisis. While Australia tries to talk down the prospect of recession in 2009 (as governments at all levels aim to spend their way back to growth), China has embarked on a domestic spending spree of its own.
Last year China’s GDP growth fell below 10 percent for the first time in five years. With exports and the economy slowing will China be able to ride out the storm and maintain strong growth in 2009?
In late 2008 China announced a massive $USD585 billion stimulus package. The move was widely applauded and it was generally received as good news for the global economy – and especially good news for Australia. In case anyone needed reminding, much of Australia’s decade long boom was generated by a rampant Chinese economy and Australia still needs a growing Chinese economy to support its own domestic economy – from exports of minerals to international students and tourism.
China upped the ante at the recently concluded 2009 National People’s Congress. Premier Wen Jiabao announced a range of additional measures to keep the Chinese economy moving and cushion the impact of a slowing economy on society – especially the most vulnerable social sectors.
During the NPC Premier Wen announced that China’s revised economic growth target for 2009 would be 8 percent. That’s lower than the double digit averages seen for the past decade – but still a staggering number compared to the rest of the world. Some Chinese economic commentators have even speculated China could exceed 8 percent growth in 2009.
China’s Economy in 2009 – on Balance the Outlook is Positive
Despite the sustained stimulus program and the essentially upbeat official growth projections, debate continues over what we can expect from China in the coming year.
If Premier Wen’s and others’ projections are arguably overly optimistic, then the chorus of naysayers who gloomily predict China now faces an economically inspired crisis of rapidly rising unemployment, social dislocation and collapsing demand have moved too far in the opposite direction. As usual, the reality of China is more complex than headlines, and the best estimate of growth seems to fall somewhere towards the middle of the two perspectives.
International economic pundits have offered a range of positive predictions for China’s economic performance in 2009.
While some independent analysts are going as low as 5 percent, the International Monetary Fund has forecast 6.7 percent and the World Bank in its recent quarterly report forecast growth of 6.5 percent for China in 2009. Yes, slower than before - but China remains the fastest growing economy in the world and looks on track to stay that way in 2009 and beyond.
Domestic Fiscal Stimulus
The massive spending announced in November 2008 (and covered in December's newsletter) has shown signs of impacting positively on the Chinese economy.
This package was strengthened recently by new measures adopted at the March NPC. According to Chinese official media the government proposed a budgeted fiscal deficit of RMB 950 billion for 2009, a record level for the past sixty years and nearly three times the last record deficit of RMB 319.8 billion in 2003.
But it also dealt with addressing social impacts, including rising unemployment. Premier Wen addressed concerns for lower income groups and rural areas. Programs to train and provide employment for laid-off migrant workers and new university graduates, the further development of housing for low-income groups, and measures to stimulate demand in rural areas were announced.
But there is no denying that exports are slowing and that the manufacturing sector will see troubled times in 2009. The Chinese media has openly carried reports of rising unemployment, especially in manufacturing hubs like Guangdong’s Pearl River Delta. Large numbers of migrant workers are reported to be returning to their home provinces from major cities as projects wind down.
China’s Economy - More Resilient in 2009
There are some tentative signs of a recovery in domestic demand. As well as the increases in investment and bank lending, car sales and electricity consumption have picked up. Although the Chinese economy faces a number of serious structural challenges, steady progress in reforms during the last decade has equipped it to respond more effectively to the new economic crisis.
In March 2009 Haruhiko Kuroda, the President of the Asian Development Bank (ADB) – while acknowledging key problems remain - told the China Development Forum in Beijing that “China today is more resilient to external shocks than it was a decade ago when the Asian crisis hit the region. After years of prudent economic policy making, the country has achieved commendable fiscal consolidation and a strong external position. It has also accumulated the largest foreign exchange reserves in the world. The banking sector in today's China is on a sounder foundation. Following a series of appropriate reforms, asset quality, profitability and capital adequacy in the banking sector have improved. The soundness of the banking system, and the limited direct exposure of banks to sub-prime and related securitized products, have helped China to face the current financial storm with confidence.” (Source ADB)
China’s Continued Global Engagement
The global economic crisis has created fears that major economies, especially the USA, might turn to protectionism. This could spark a tit for tat trade war and only deepen the crisis. How is China responding?
China appears intent on maintaining its opening and engagement with the world economy. It has too much to lose otherwise. The world buys its goods, and China has been the biggest destination for international investment flows for a number of years. It also needs to buy raw materials commodities, and is pursuing a global program of new investments (see other section). In general China has signalled it will use its economic clout to support the world economy and is committed to a role in global economic recovery.
China holds the world’s largest foreign exchange reserves. By the end of 2008 this amounted to USD$1.95 trillion - the next closest is Japan with USD$1.03 trillion. China is also the United States largest creditor – to the tune of an estimated USD$1 trillion. China has announced it will continue to use its reserves to make huge investments in United States Treasury Bills – in other words it will help fund President Obama’s domestic stimulus package. (Source China Daily 24 March 2009)
The Impact of the Domestic Stimulus Package – So Far
Not everyone agrees that governments can – or should – adopt big stimulus packages to address the global economic crisis. And China’s big spending plan –like those in the USA and Australia – has been criticized by some.
A recent feature in the Economist magazine (12 March 2009 from The Economist print edition) drew attention to some of the key positives in China’s attempts to keep the economy pushing forward. The Economist article concluded by asking not whether China’s stimulus package would work, but whether it would be actually be big enough to deliver the ambitious growth targets set for 2009.
Some of the elements of the package identified by the Economist included:
New Investment
“Chinese investment in railways, roads and power grids is already booming. In the first two months of this year, total fixed investment was 30% higher in real terms than a year earlier, and investment in railways tripled.”
New Bank Lending
“Bank lending grew by 24% over the past year. The true gauge of monetary easing is not the cut in interest rates, but whether it succeeds in spurring new lending. China is one of the few countries in the world where credit has accelerated since the start of the global credit crunch—though some of the lending is of the state-directed sort.“
Global Trade Contribution
“China has not only accomplished considerable fiscal and monetary easing, by allowing the Yuan to rise by 18% in trade-weighted terms over the past 12 months, Beijing is passing on some of that boost to the rest of the world.”
Conclusion
How 2009 finally shapes up for China will only partly depend on the success of its own stimulus policies and how well its officials and institutions implement their tasks.
But just as much depends on how other countries – especially the United States and Europe – manage their own recovery programs. China’s massive export sector – which is based on the world’s most dynamic manufacturing sector – relies on recovery of demand in these markets. Anyone watching China knows that China’s economy is as much a hostage to global demand as any other nation – probably even more so.
The recently concluded G20 summit in London has created optimism about new international efforts to spur growth and trade – which will be good news for China, and, we hope, good news for all of us. |
