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Considering China's options in weakening global economy

David Dollar's picture

The December export numbers for China showed a 2.8 percent decline from the year before. This was the worst showing in a decade, but better than the 4-5 percent decline expected by the business press. There is still plenty of cause for worry, as economist and blogger Brad Setser wrote in a recent post, "This really doesn’t look good". While Setser is talking about the breath-taking drop in Korean and Taiwanese exports in December, some of those exports normally would be on their way to China for further processing and re-export. So, the grim news from those economies in December probably presages more tough times ahead for China's exports.

In this deteriorating global environment, the Ministry of Finance and the World Bank's Beijing office last week held a seminar with some very good international and Chinese economists to discuss China’s macroeconomic policy options. While the economists had a wide range of views, I took away a pretty strong consensus from them on three things(1) preference for stimulating domestic demand over external demand; (2) preference for social spending over infrastructure in the stimulus package; and (3) given that there will inevitably be some infrastructure spending, a preference for projects that improve urban quality of life over those that merely expand economic capacity.

China has slowed down because it experienced a large drop in domestic demand (in the real estate sector) as well as in external demand for its products. In theory, the country could try to compensate for this either by stimulating domestic demand or by trying to induce greater external demand through devaluation or export promotion. The latter approach is not likely to work for two reasons. First, the external slowdown is so serious that efforts to gin up external demand are not likely to have much effect. Second, such efforts would definitely be viewed as "anti-social," especially by other developing countries. In this crisis, there are many developing countries that now face large external deficits and do not have big international reserves. They have no choice but to devalue. China still has a large trade surplus and massive reserves, so China does have a choice.

The domestic stimulus option is also attractive because China has huge fiscal space to do so. It has little public debt relative to GDP and has run budget surpluses during the boom years. Hence China can easily afford a large fiscal stimulus, even beyond the fiscal package that has already been announced.

A second area of broad agreement among the economists was that the stimulus plans announced so far mostly focus on infrastructure. These may take some time to get going and will not help the large numbers of workers losing their jobs in the export sectors. China has made a lot of progress in setting up a structure of safety net programs: urban and rural minimum income support; rural medical cooperative scheme plus medical assistance for the poor; central transfers to expand rural education. The central government could afford to expand all of these programs quickly. In general they are administered at the local level, but often lack sufficient local funding to make them fully effective. Central transfers to fully fund and expand these programs would be effective stimulus that would also address social needs. Money to support laid-off workers will be spent quickly, whereas some of the proposed infrastructure projects will inevitably take months to get off the ground.

A third interesting point was about the kinds of infrastructure projects that should be included in the stimulus. China stimulated the economy in 1997 through infrastructure projects that also set the stage for long-term growth by addressing bottlenecks. This is a nice idea that is still relevant. In 1997, there were bottlenecks in highways, power, sea ports, and airports. It is important to recognize, however, that today the bottlenecks are different. Many provincial airports are seriously under-utilized and the highway system is already well-developed, as is power and seaports. Hence there is a danger in this situation of "fighting the last war" – expanding the same infrastructure that is now basically excellent.

On the other hand, there are obvious infrastructure needs. There is not enough low-cost housing for migrants to move permanently to cities with their families; not enough schools and social services for these migrants; not enough capacity in wastewater treatment and environmental protection. The railway system is under-developed compared to highways or airports. So, there are lots of good opportunities for infrastructure investments that improve the quality of life. The challenge is to choose projects that actually address current bottlenecks.

Adjusting to the global crisis provides a "win-win-win" opportunity for China. It could stimulate domestic demand in a way that keeps the growth rate high, addresses important social gaps, and makes the development path more environmentally friendly.

Image credit: uzvards at Flickr under a Creative Commons license.


Submitted by Ben Davies on
David, Thankyou for an informative piece on how China could respond to the present crisis. These proposals come from Economists. How much influence do they have with govt? Also bear in mind the relative opaquness of a Command economy, where does one go to glean evidence that they are or may instigate such ideas?

On economic policy, there is now pretty open debate in the media and online about different options. I think the idea that the global crisis provides an opportunity for China to rebalance its economy is gaining popularity. For example, here is a short extract from an opinion piece in the China Daily entitled, “Recession an opportunity for economic transition,” by Zhang Moran, researcher at the State Information Center: “An ever-shrinking external demand makes it more urgent for the country to expand domestic demand and step up industrial restructuring. It is expected that the country's upcoming second round of stimulus program will lean more toward spurring consumption and promoting system reform and industrial restructuring… Also, workable measures should be taken to lower the threshold for unofficial [private] capital's access to some fields. This will help improve the current unreasonable investment structure. The announced stimulus packages indicate that the government is still centering spending on infrastructure construction and some basic industries. However, such investment-driven economic model would find it difficult to prop up a sustained employment expansion. At the same time, the country's huge amounts of social capital have no ideal fields for investment given that a higher market access standard is in place. Thus, the government should open more fields to unofficial capital and provide them convenient access to some monopolistic sectors.” As far as monitoring the details of the government stimulus programs, the key event will be the National People’s Congress in March. The major economic speeches will reveal quite a bit about what is actually in the 2009 budget and what are the major policy initiatives.

Submitted by rahul wani on
In terms of options China has many. but I suggest few different types than our normal solutions. China has a vast non agricultural waste land not which is difficult to cultivate. The Carbon emission of its industry is one of the largest (in top 5 countries of the world) with slowdown in exports it has to find an alternate way of employment generation and sustainable development. my suggesiotn is to let China start using its huge unemployed manpower to cultivate the locally available Bio Diesel plant/solar power farms/ Wind Power Farms etc. this will result in two things..first it will generate an employment opportunity for the millions in the rural sector and reduce the huge inflow of migrants on few selected centres. secondly it will help China in selling the Carbon Credit points generated out of this activity. simultaneously it can take help of its huge forex reserves to build its Rural Power stations, Rural Railways network and water ways wherever possible. As such the present system of economists to consider Forex Reserves as a major criteria for measuring the strength of an economy needs a major change in the approach. ultimately it is the sustainability of an economy which makes it more relevant for survival. thus even without any outside support/export/import if a country can survive in a reasonably good standard of living then the conomy of that country should be treated as a sustainable economy. only few countries in the world can have this luxury. China is one amongst them. hence the Chinese authorities should think on these lines to wipe out the potential issues of forex and start going in for barter arrangements. this will reduce its dependence on third country currency (viz USD/EUR/JPY) and make it a self made country in all the aspects. after all a country is known and respected for its inherent strengths and not on its borrowed strengths which comes with stock of third country currencies on whom they have no control on its printing or even its cancellation.

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