This time last year, when the dismal 6.8% GDP growth data for China in the 4th quarter of 2008 came out, David Dollar, the former country director of China in the World Bank, asked in his blog whether one should interpret the data positively or negatively. (In other words, was the glass half full or half empty?) Compared with this uncertain situation a year ago, the Chinese economy is now in much better shape. Newly released data shows that the average GDP growth in 2009 is 8.7% – well above the most upbeat forecast made in early 2009. The growth even accelerated to double digits in the 4th quarter of 2009, standing at 10.7% (figure 1).
The improved economic growth is mainly a result of the forceful policy stimulus that boosted domestic investment. In 2009, with foreign trade hard hit amid the global crisis, China’s net exports, which used to contribute more than 2 percentage points to the country’s GDP growth before 2008, shrunk significantly, subtracting over 3 percentage points from the growth (figure 2). Facing the free fall of the foreign trade in late 2008, the Chinese authority quickly implemented forceful policy responses including a big fiscal stimulus package and very easy monetary policy. These measures have provided significant support to domestic demand. Fixed asset investment (FAI), for instance, has surged since the end of 2008, contributing over 7 percentage points to GDP growth in 2009. The policy-driven boom in domestic demand has partly offset the downward pressures put by weakened external demand, helping the Chinese economy regain considerable strength in recent quarters.
However, the policy stimulus is set to withdraw in the future. Alongside the visible support it provided to the real economy, the policy stimulus has also led to some unfavorable consequences, mainly surging property prices and mounting inflationary pressures, among others. Amid the easy monetary stance, property prices have surged nationwide, led by big cities. Reported house prices in Beijing and Shanghai have increased by about 50% since early 2009 while the average price level in major cities registered an over 25% gain at the same time. Moreover, high liquidity has also fueled inflationary pressures. On a quarter on quarter seasonally adjusted basis, consumer price index (CPI) and producer price index (PPI) grew by 6% and 13% (annual rate) respectively in December 2009 (figure 3), leading to aggravated concerns about high inflation in 2010. Although these risks seem to be manageable so far, they have undoubtedly increased the case for the withdrawal of policy stimulus.
Hence, a difficult choice regarding the exit from the policy stimulus is challenging China’s policy makers. On one hand, policy makers should avoid a premature withdrawal of the stimulus, which would kill the ongoing recovery. On the other hand, the longer the stimulus is kept in place, the bigger the risks (asset bubble, high inflation, etc.) Therefore, it is reasonable to expect substantial uncertainty down the road, as policymakers try to strike a delicate balance between exiting too soon and exiting too late.
A year ago, David wrote in his blog that there was a lot of uncertainty around Chinese economy, and China’s performance depended crucially on following the right polices. Now, I find his claim still holds for China’s economic reality. Nevertheless, given China’s economic performance in 2009, there’s good reason to be more optimistic than before. In the end, the glass has been half full.