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2 SPEAKING
FREELY Beijing faces test in run-up to
'stimulus 2' By Niall Coen
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please
click hereif you are interested in
contributing.
Reform in China
has come to a critical stage. Without successful
political reform, it is impossible for us to
institute economic reform. Indeed, gains we have
made may be lost. - Premier Wen Jiabao, March
14, 2012
Reforms in China that began under
Deng Xiaoping in 1978 would see the Chinese
economy expand at approximately 10% annually over
the following three decades. The suppression of the
Tiananmen mass movement
in 1989 was followed by a conservative backlash
against further reform that threatened to stall
its progress.
Deng's "Southern Tour" in
1992 returned China to the reform path - this
time, decisively. Later, the Asian financial
crisis of 1997 would prove to be a watershed
moment internationally, when China intervened with
a fiscal stimulus program that was widely credited
with staving off regional economic contagion,
while providing the countries of the region with
stability and support.
China's gross
domestic product (GDP) continued to rise during
this period, though the rate of growth dropped
below 10%, returning to pre-crisis levels only by
2003. In November 2007, such was the frenetic pace
of economic expansion that the Chinese government
began to implement contractionary policies in an
effort to rein in growth.
By 2008, the
30th anniversary of Deng's "reform and opening",
China's share of world trade had increased to 10%
(compared with 12% for the United States, and 16%
for the European Union), China had achieved the
Millennium Development Goals, and the number of
Chinese in absolute poverty had fallen by half a
billion to 135 million people by World Bank
estimates.
This was also the year, of
course, that China hosted the Beijing Olympics,
which raised Chinese optimism and confidence to
heights unprecedented in its modern history. Such
exceptional development had not come without its
costs, which included increasing inequality
(within cities, but especially between regions),
social dislocation, corruption, and severe
environmental degradation.
Serious as
these problems were (and remain), it was China's
dependence on its export markets that rendered it
most vulnerable, and in 2008, reform-era China
would face its third major challenge: the global
financial crisis.
In the past two decades,
national economic growth has been led by
capital-intensive industrial development. This has
occurred to the benign neglect of the primary and
tertiary sectors.
A number of external
factors account for China's strong economic
growth: increasing global demand; the emergence of
new markets; and the acceleration of international
trade and capital flows, which facilitated
export-led growth. Domestic factors included
increasing labor and capital productivity; a large
labor pool, which exerted downward pressure on
labor costs (while industrial productivity
continued to increase); reform and improvements in
macroeconomic management (including, notably
conservative fiscal policies, where budgetary
revenues and expenditures have tracked each to
within a few percentage points in the past decade
; and pro-growth local governments); solid
infrastructure; and, crucially, high rates of
saving and capital investment.
Further,
it's important to note that it was domestic, not
foreign capital, that financed China's growth
during this period. While foreign direct
investment (FDI) played (and continues to play) a
valuable role in terms of the transfer of
technology and best practices (in corporate
governance, for instance), and in terms of access
to international business networks (markets,
suppliers, etcetera), it amounted to only 3% of
GDP in the period 2002-2007. Even since
before its accession to the World Trade
Organization in 2001, China had been
internationally criticized for its "unreformed"
banking sector, so it is no small irony that this
sector, largely disconnected from the ebb and flow
of international finance, would shelter the
country from what was to come.
The Bank of
China provides a good example: one of China's
largest banks, its exposure to US asset-backed
securities was only 1.4% by the end of 2008.
Similarly, a solid fiscal position, a limited
reliance on foreign capital (as treated above),
and large foreign reserves put China in a good
position to respond when the tide of international
capital, and export demand went out as the 2008
global financial crisis spread.
By the end
of 2008, the situation China faced was grave.
Moreover, most every international indicator
pointed to continuing decline, while the United
States - the source of these troubles - was
virtually leaderless (with the George W Bush
presidency ending, and Barack Obama not yet
inaugurated).
In February 2008, the
Chinese Consumer Price Index (CPI) had reached
2.5, but fell sharply thereafter to approximately
minus 0.75 in the very next month, trailing along
the bottom through the remainder of 2008, and into
2009 (experiencing a kick to 0.9 in January 2009,
with the introduction of the stimulus, before
falling into negative territory again). Similarly,
real estate investment growth fell off a cliff,
dropping from a July 2008 high of approximately
34% to around 1% by January 2009.
Chinese
export growth collapsed in a single quarter (2008
Q3) from about 23% to minus 8% by the end of the
year, and continued to fall into the second
quarter of 2009, where it reached a nadir of minus
23% - an extraordinary drop in growth from peak to
trough.
Manufacturing represented the bulk
of this, but there were spill-over effects in the
tertiary sector. GDP growth (quarter-on-quarter)
followed a similar trajectory, falling to around
6% by 2009 Q1. This was an important number: 8%
has long been held to be the "magic figure" below
which annual GDP growth must not fall if stability
is to be maintained (notably, by providing
employment for the millions who join the workforce
every year), and economic problems prevented from
becoming social - and political - problems.
It is widely held that the primary source
of government legitimacy in China is not
nationalism, or domestic security, but rather
economic growth (which is itself, of course, also
a primary source of national stability). That not
only the legitimacy of the party, but also the
very stability of the nation itself were suddenly
brought into question called for a radical
response. In November 2008, therefore, responding
to this precipitous decline, Premier Wen Jiabao
announced a stimulus program of counter-cyclical
spending amounting to 4 trillion yuan (US$590
billion) - in relative terms, a package three
times larger than the stimulus effort in the
United States.
There were four main
components to the stimulus: an investment program,
accommodative monetary policies, tax cuts, and
measures to ease the burden on state-owned
enterprises. The investment programme included
seven priority areas: transport and power
infrastructure; earthquake reconstruction; rural
village infrastructure; environment, energy
efficiency and carbon emission reduction;
affordable housing; technological innovation and
restructuring; and health and education.
Of these, infrastructure investment
amounted to the largest share at 37.5%, while
health and education accounted for only 3.8%.
Post-earthquake reconstruction amounted to 25% of
the total. Since this was clearly expenditure that
would have been unavoidable anyway, classifying it
as "stimulus" spending lacked credibility, and
implied that the remaining figures could not be
taken at face value.
Importantly, the
central government only committed to funding 1.18
trillion yuan of the total, with the remainder to
be financed by local government and other domestic
sources. Further, the contractionary measures that
had been introduced the previous year were
reversed, and new policies were introduced to
stimulate growth.
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