Inclusive, Balanced, Sustained Growth in the Asia-Pacific

2. China: Achieving Sustained Growth

China: Achieving Sustained Growth 49 2 China: Achieving Sustained Growth Yiping Huang I. HOW THE CRISIS AFFECTED CHINA Aggressive fiscal and monetary policies helped to reverse the slide of the Chinese economy quickly, and growth rate in 2009 eventually exceeded the government’s original target of 8 per cent. The year-on-year growth rate of GDP rose to 7.9 per cent in the second quarter of 2009 from 6.1 per cent in the first quarter, while annualized quarter-on-quarter growth confirmed an even earlier rebound, from 0.4 per cent in the fourth quarter of 2008 to 6.2 per cent in the first quarter of 2009 and 14 per cent in the second quarter (see Figure 2.1). The speedy pick-up of the Chinese economy took many investors by surprise. In retrospect, such “surprise” was caused by two main factors. First, towards the end of 2008, manufacturers quickly reduced levels of inventories due to collapsing commodity prices and growing uncertainty of global economic outlook. This de-stocking implied that production decelerated even faster than the underlying demand. Second, there was scepticism about Chinese government’s ability to turn around the economy. The common reasoning was that, after thirty years of economic reform, 50 Yiping Huang FIGURE 2.1 China’s Real GDP Growth (% yoy and % qoq, saar) Source: CEIC Data Company and author’s estimates. China: Achieving Sustained Growth 51 the Chinese economy had become a lot more market-oriented. Therefore, the government’s ability in influencing economic activities probably diminished over time. In retrospect, such pessimism about the near-term outlook for the Chinese economy was overdone. Clearly, the de-stocking process cannot continue forever. Once manufacturers start to rebuild inventories, production could accelerate rapidly. More importantly, while the Chinese economy has become more market-oriented, the government’s ability in mobilizing resources actually strengthened, not weakened, during the past years. This is evidenced by rising share of government revenue of GDP, improving quality of bank assets, improving current account position, growing foreign exchange reserves and improving profitability of the state-owned enterprises, at least during the past decade. During the past quarters, unusual fiscal and monetary policies worked together to reverse the declining trend of the economy. The RMB4 trillion announced by the State Council in November 2008 provided a cornerstone for the government’s stimulus policy. The combined investment plans proposed by provincial governments was even bigger, at RMB18 trillion according to one account. These are probably the largest stimulus policies in human history. Monetary policy expansion was equally astonishing. During the first half of 2009, commercial banks’ new loans amounted to RMB7.4 trillion, almost 150 per cent of the central bank’s target for the entire 2009. China was the first to come out of growth recession among the world’s major economies. And the unusual policy actions mean that Chinese growth probably will stay on strong path in the coming year or two. There is little risk that the Chinese government will not achieve its growth target of 8 per cent. The fast rebound of Chinese growth was positive news not only for China but also for the whole world. It injected much-needed support to confidence worldwide. The international commodity markets, for instance, began to stabilize and even improve, after months of weakening. China will most likely be able to sustain strong growth over the period 2009–14, although it has to deal with some tough short-term and longterm challenges. The IMF has been consistently too pessimistic about Chinese growth for 2009–10 during the current crisis, but its forecast of growth returning to 10 per cent level after 2010 seems plausible. 52 Yiping Huang II. ECONOMIC DIFFICULTIES ARE NOT YET OVER It is important to recognize that while China’s GDP growth picked up quickly, economic difficulties are not yet over. First, the export outlook probably will not improve any time soon. During the first half of 2009, exports declined at a 20 per cent pace. Recovery of export growth will probably be a slow process, as recovery of major industrial economies is likely to be slow-paced.Although the U.S. economy has also turned around, its future expansion will probably involve improvements in net exports, i.e., less imports but more exports. More importantly,American households are likely to increase their saving rates after the financial crisis, which means in the...