Some Western commentators urge Chinese policymakers to reconfigure the country's growth patterns, which they argue is crucial for global macroeconomic rebalancing...many Chinese leaders are apparently not convinced that the country should take the lead in such a global endeavour.
CHINA'S economy probably registered a growth rate of about 8.5 per cent last year - lower than the 9 per cent of 2008 but above the 8 per cent that Premier Wen Jiaobao pledged to maintain in the crisis year. China has clearly regained much of its former momentum and is expected to grow by at least 9.5 per cent this year.
The rapid spread of the global financial meltdown alarmed the Chinese leadership. Even before 2008 had come to an end, Mr Wen put up a huge stimulus package of four trillion yuan (S$814 billion). The bulk of the spending was earmarked for infrastructure and other government- backed heavy industrial projects. But for the first time, a great deal of money went also to boosting domestic consumption, including spending on social services.
The stimulus policy has produced results, with the slowdown bottoming out in the first quarter of last year. In the second quarter, the economy chalked up strong growth of 7.9 per cent. This is a typical V-shaped recovery.
Not only was China the only major economy to chalk up such a strong growth performance amid a global slump, but its growth also carries implications for both the global and regional recoveries.
The crisis, in diminishing the economic strength of developed countries, gave China the chance to narrow the gap. Beijing recently revised its gross domestic product upwards, correcting its previous underestimates of the service sector. This puts China's GDP in 2008 at US$4.6 trillion (S$6.4 trillion) and about US$5 trillion for last year. The country looks set to replace Japan as the world's second-largest economy this year.
China, with its 8 per cent share of global trade, is also about to replace Germany as the world's largest trading country. It has already replaced the United States as the world's biggest automobile market.
Naturally, the Chinese leadership has emerged from the crisis more self-confident, and with increased clout in the international arena. It seems quite content to put the economy back on the growth track first and leave the problems of restructuring and rebalancing to the future.
But China faces many short- and medium-term structural problems, from industrial overcapacity to bank overlending. One disturbing result of the recession is that the state sector has come out as a clear winner at the expense of the private sector.
China's economic growth has been fuelled recently by domestic demand, particularly domestic investment. Of the original 9 per cent GDP growth in 2008 (lately revised to 9.6 per cent), domestic investment and domestic consumption each accounted for 4.1 percentage points, while net exports (exports minus imports) made up only 0.8 percentage point. In previous years, the shares of domestic investment and net exports were higher. Macroeconomic controls in the first half of 2008 and the plunge in exports in the last quarter obviously trimmed these figures.
In the first 11 months of last year, domestic investment grew at a hefty rate of 32.1 per cent, compared with the same period in 2008. Domestic consumption grew at a moderate rate of 15.3 per cent and net exports at negative 30.6 per cent. The changes in the relative contribution of each to growth last year, especially that of domestic investment, has been profound. In other words, the recession has had a significant impact on the growth pattern.
Significantly, the consumption component of growth for last year lagged very much behind investment, despite various government incentives to stimulate consumer demand. Though consumer spending rose overall last year, the increase was not enough to offset the decline in external demand. China's economy remains largely growth-biased and investment-biased, and there are too many institutional and economic constraints to expanding consumption. The widening income gap, moreover, will hinder the government's efforts to promote consumer spending.
As a source of growth, external demand can be misleading. The Chinese economy is thought to be quite dependent on trade as exports account for about 30 per cent of GDP. But GDP is a value-added concept, and the contribution of net exports to China's GDP is actually much lower, particularly since a lot of China's exports come from processing products, with little domestic value added. For the first 11 months of last year, total trade actually contracted by 17.5 per cent, year on year, to US$1.96 trillion. Accordingly, the contribution of 'external demand' to GDP growth for this period was a negative 30.6 per cent.
In the regional context, the recession has strengthened China's economic ties with its Asian neighbours, as rising Chinese demand has partially made up for the weaker demand from developed countries. The China-Asean Free Trade Agreement came into effect this month and China is expected to have a more prominent presence in the region, not just through trade but also investment.
The Chinese economy seems to have recovered fully from the financial crisis but the task of restructuring lies ahead. The growth pattern of any country is determined by its economic and institutional characteristics and these cannot be changed overnight.
Take domestic consumption. In China, wages and salaries account for only 42 per cent of national income, compared with 55 per cent in developed countries. Furthermore, households, state corporations and government together put aside almost half of China's GDP as savings. How is the government to expand domestic consumption?
Restructuring has to be a long-term strategy. Some Western economists and commentators urge Chinese policymakers to reconfigure the country's growth patterns, which they argue is crucial for global macroeconomic rebalancing. Beijing has no clear consensus on this strategy and many Chinese leaders are apparently not convinced that the country should take the lead in such a global endeavour.
For example, China has been under international pressure to allow the yuan to appreciate. But on Dec 27, Mr Wen declared that China would not do so. Part of the reason for this refusal is the desire to prevent unemployment by protecting China's large export sector.
Some Chinese economists have also argued that global macroeconomic rebalancing is a collective effort, and Beijing should not be forced to undertake it alone. China is well aware of Japan's experience with unilaterally revaluing the yen: The Japanese economy suffered but the imbalances in the US economy did not rebalance themselves.
China may have its reasons for sticking to its existing development policies. But its leaders should also be aware of the risks of pursuing such short-term strategies. China needs to not only maintain its economic rebound but also to improve the quality of its recovery.
The writer is a professor at the East Asian Institute, National University of Singapore.
Source: Straits Times, 19 Jan 2010.
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