China and the Global Economic Crisis

By HU JIANGYUN

AS the global economic meltdown triggered by the U.S. subprime lending mess enters its fourth year, signs of a full recovery are still nowhere to be seen. The Eurozone debt crisis rages on, further troubling the fragile world economy.

Like the Great Depression of the 1930s, the current crisis is likely going through a cycle of contraction, stagnation and recovery. Unlike the Great Depression, however, which was primarily a secondary sector crisis, today's economic malaise is blamed on the extreme imbalances between many countries' bloated tertiary, particularly financial, sectors and the real economy that supports them. Tertiary sector imbalances have grown to such extremes that a sustainable equilibrium with the real economy is unattainable. Investments that would benefit the livelihoods of working families are being overlooked in favor of the excessive profits that can be made in unproductive industries.

The remedy for the Great Depression in the U.S. proved to be stronger government intervention in the market – pursuing expansionary economic policies based on John Maynard Keynes's effective demand theories. The Obama administration's responses to the current crisis have followed similar lines – adopting a monetary policy of quantitative easing and issuing more sovereign debt, reforming the national healthcare system and nationalizing corporate assets. Government debt has shot up not only in the U.S. but also in Europe, where hard-hit economies have pursued U.S.-style measures as well as instituting structural tax cuts and ramping up spending in the public sector through education and healthcare.

The countries less affected by the economic upheaval also devised a variety of measures to combat its effects. China in its turn embarked upon a number of major initiatives to shore up its economy after the Lehman Brothers collapsed in October 2008.

A RMB 4 trillion stimulus package was enacted to signal the Chinese government's confidence in overcoming the crisis. This sizeable sum has been channeled into seven major areas – projects concerned with people's livelihoods (RMB 400 billion), rural projects (RMB 370 billion), infrastructure development (RMB 1.5 trillion), social undertakings including education, health, culture and birth control (RMB 150 billion), emission reduction and environmental projects (RMB 210 billion), industrial restructuring and technical upgrading (RMB 370 billion) and finally rebuilding disaster zones, including earthquake-wrecked Wenchuan County (RMB 1 trillion).

The decision was also made to overhaul and beef up 10 strategic industries, namely the automobile, iron and steel, textiles, equipment manufacturing, shipbuilding, electronics and information, light industry, petrochemicals, nonferrous metal and logistics industries. This aimed to give greater support to innovation in enterprises and their merging and regrouping into more productive entities. 

In the crisis China also pursued a loosening of monetary policy. Several rounds of interest rate cuts were made in a short time. The government sought to brace up credit, insurance and mortgage services and lowered the required ratio of registered capital in fixed asset investment projects. For public housing and general commercial housing projects, this ratio was dramatically lowered to the 1996 level of 20 percent, having shed 15 percentage points. To stimulate domestic consumption various measures were put in place, such as granting subsidies to promote the purchase of electric home appliances by rural residents, and tax reductions and financial subsidies for other consumer goods.  

Another significant step taken in the wake of the global financial crisis was to raise the tax rebate rate for exports in order to entrench Chinese businesses' footing in the global market. Within the scope of this intent, the Catalogue of Prohibited Commodities in Processing Trade was also suspended. Financial services for businesses, including trade credit, bank guarantees and insurance, were improved. Chinese businesses were subsequently able to strengthen their foothold in world markets despite the protracted slump.   

Domestically, access to credit (and microcredit) for small and medium-sized enterprises (SMEs) was also made easier through the establishment of specific-purpose financial departments and institutions to serve these customers.

China continues to collaborate with international and regional organizations, such as the G20, ASEAN and the BRIC countries, in the search for solutions to the world's economic woes.

In 2010, alarmed by rising inflation and an overheating housing market, the Chinese government again adjusted its monetary policy, this time lifting lending rates. These measures helped to cool the housing market.

In 2011 China promulgated its 12th Five-year Plan for National Economic and Social Development, setting goals for stable and sustainable economic growth. China will no doubt continue to advance its innovation imperative and develop strategic energy saving and green industries such as IT, biology, high-end equipment manufacturing, new energy, new material, and alternative energy transport.

In general the stimulus package during the financial crisis has had helped significantly in sustaining China's economic growth, which reached 9.2 percent in 2009 and 10.4 percent in 2010. Though 2009 cargo imports and exports dipped 16 percent and 11.2 percent respectively, the Chinese share of global exports increased from 8.88 percent in 2008 to 9.6 percent in 2009; its global import share climbed from 6.86 percent to 7.91 percent over the same period.  

China's foreign trade started on a renewed growth path in 2010. Exports soared by 31.3 percent and accounted for 10.36 percent of total global volume. Imports were up 38.7 percent, equal to 9.07 percent of the world total.

The economic woes of the West have persisted through 2011, with the U.S. had its credit rating downgraded and the Eurozone sinking deeper in its sovereign debt morass. Instead of addressing the problems in their own economies, some countries have taken to pointing fingers at others and avoiding their own obligations. The specter of protectionism has reared its ugly head once again. China has been blamed for the "negative impact" of its growth, and pressed to hasten the appreciation of its currency. These procrastination tactics, while diverting domestic public attention away from the real problems, do nothing towards helping their economies. The U.S. and countries of the Eurozone must face their domestic problems square on. Fundamental changes to their institutions must be made. They must immediately set about designing effective plans for recovery so that the world economy can embark on the road back to prosperity.