China’s gross domestic product (GDP) is estimated to have grown 8.7% year-on-year in 2009— once again the highest rate in the world—with the fourth quarter increase reaching 10.7%, compared with 6.3% in the fourth quarter of 2008. For much of the world, China’s ability to shrug off the global financial crisis and maintain a strong growth trajectory in 2010 and 2011 seems too easy.
But securing China’s growth has been anything but easy. The strong, decisive, and deftly timed stimulus policies at the start of the financial crisis did, of course, play a major role in China’s quick rebound. As early as October 2008, when the crisis first hit, China’s government adopted a comprehensive policy package designed to prevent the economy from sliding further. The fiscal deficit was equivalent to 3% of GDP in 2009, which generated 3% GDP growth, while the deficit in 2008 was literally zero.
Photo: Nelson Ching/Bloomberg
The country’s so-called “moderate relax” monetary policy played its part by allowing bank lending to expand by almost 34% in 2009, with M2 money supply growing by 27%. Monetary growth may increase inflationary pressures and the risk of an asset bubble down the road, but it helped ensure that China’s economy did not fall into a vicious downturn when the financial crisis hit. Other policy moves aimed at boosting demand in the housing and auto markets also proved effective.
But China’s crisis management is only part of the story. It does not explain why other countries that took even stronger measures failed to generate a similarly rapid recovery, or why China’s government seems to have more room than others for policy manoeuvre.
China’s budget was actually in surplus and its government debt-to-GDP ratio only 21% before the crisis (now it is around 24%), much lower than any other major economy. That gave Chinese policymakers freedom to spend money to confront the crisis. Moreover, the level of non-performing loans in Chinese banks was quite low when Lehman Brothers collapsed, which allowed Chinese policymakers to let it increase in order to battle the crisis.
Moreover, the Chinese economy was in good shape when the global crisis hit. Cautious macroeconomic management during China’s boom, including early self-adjustment, put China in a favourable position. Its economy had been booming since 2004, but officials did not step aside and “let the market decide”. Instead, they adopted countercyclical measures aimed at preventing the economy from overheating.
The government increasingly tightened its policies as the economy continued to surge ahead due to asset bubbles, high local-government investment spending and buoyant demand in global markets for Chinese goods. Overheating in the housing market was brought to an end in late September 2007, nipping a nascent nationwide bubble, and a stock market bubble was punctured the following month. Moreover, numerous local investment projects were stopped, while measures to slow the growth of net exports—including a 20% revaluation of the renminbi and a significant cut in tariff rebates for exports —brought down annual export growth from around 30% to a more reasonable 17% in late 2007.
As a result, by the fourth quarter of 2007—one year before the global financial crisis hit—China’s economy started to cool. The quarterly growth rate decelerated from 13% in the fourth quarter of 2008 to 9% in the third quarter of 2009.
In short, it is because China began its adjustment one year before the global crisis that its economy emerged earlier than other countries. The lesson is that booms have to be managed adeptly, and that financiers have to be supervised in their pursuit of ever higher returns. That is true for developed economies no less than for a developing economy such as China.
China’s economy has structural and institutional problems—what developing country does not? China’s macroeconomic policies are probably still too “administrative”. When many of the most important actors in an economy are insensitive to market price signals, as they are in China, economic policy will need to be administrative in order to deal effectively with those players. But one benefit of this administrative bias over the past 30 years is that, at least most of the time, China has been cautious about overheating—and determined to step in whenever necessary to cool the economy, despite the protests of “smart” market participants.
To be sure, the authorities have sometimes been overly cautious. But for an economy in its early stage of development, and for the first generation of companies with young “animal spirits”, excessive caution seems better than the alternative. In fact, when a country’s economic growth is continuously above 9%, policymakers probably cannot be too cautious.
No doubt, government macroeconomic management that is too strong may delay necessary market-oriented reforms. But the financial crisis has shown that a 21st century market economy requires government participation to function. For a developing economy like China, it is better to have a government that plays an active role in avoiding the ups and downs that the Western economies experienced in their early days—and are still experiencing.
Fan Gang is professor of economics at Beijing University and the Chinese Academy of Social Sciences, director of China’s National Economic Research Institute, secretary general of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China. Comments are welcome at firstname.lastname@example.org