The impact of the international financial crisis has caused the Chinese economy to contract rapidly since September. This has come as a shock to both China’s leadership and other countries around the world.
After a series of strongly expansive monetary and fiscal policies, the economy seemed to have stopped its decline in December, at least for the moment. Whether the Chinese economy will continue its rebound will, however, be determined by the strength of the global economic revival.
China’s growth rate has now dropped for six consecutive quarters.
With a drop from an 11.9 percent growth rate in the second quarter of 2007 to 6.8 percent in the fourth quarter last year, the growth rate has contracted by 5.1 percentage points.
There are two broad reasons for the contraction.
Until the second quarter of last year, the contraction was an effect of China’s macroeconomic controls.
From the third quarter onwards, however, it was an effect of the international financial crisis.
China’s macroeconomic early warning indicator began slipping last June.
By December, it dropped to 78.7 points, 38.6 points lower than last May and the lowest point since August 2002.
This was an indication that China’s economy was at a low point.
In June last year, the Purchasing Manager Index (PMI) stood at 52 percent, but by November it had fallen to 38.8 percent, a record low, and the industrial production growth rate fell from 16 percent in June to 5.4 percent in November, reaching a seven-year low.
To deal with this severe decline, the Chinese government announced on Nov. 11 that it would invest 4 trillion yuan (US$585 billion) over two years to resuscitate the economy. At the same time, the Bank of China dropped the reserve requirement by 3 percentage points and released approximately 1.1 trillion yuan from September to December.
Within 100 days, China lowered interest rates five times, altogether lowering one-year deposit and loan interest rates by 1.89 percentage points and 2.16 percentage points respectively, the largest drop in 11 years.
Stimulated by the relaxed monetary policies, the decreasing rate of growth of China’s broad money supply — M2 — stopped at 14.8 percent last November and rebounded to 18.8 percent in January.
In addition, after a big drop in new loans in November, the year-on-year figure rebounded by 771.8 billion yuan in December, increased by 1.62 trillion yuan in January and by 1.1 trillion yuan last month. Total new loans in the last three months have exceeded the total for the first 11 months of last year.
As a result of expanded monetary and fiscal requirements, industrial production growth in December saw a slight rebound to 5.7 percent, although it seems to lack the strength to rebound further.
However, in December, the PMI rebounded slightly to 41.2 percent, and this continued in January and last month with further increases to 45.3 percent and 49.0 percent respectively. Furthermore, the New Export Orders Index has gradually rebounded from an all time low of 29 points to 33.7 points in January and 43.4 points last month.
These data show that the Chinese economic rebound that began in December last year continues.
However, China’s V-shaped economic rebound is still being affected by a few variables.
First, if the international economic situation continues to decline, it will be difficult to sustain China’s economic rebound in the long term.
In October last year, Chinese exports increased 19.2 percent year on year. In January, however, annual export growth fell back to minus 17.5 percent. At the moment, developed countries have entered an economic recession and it will be difficult to restore the strong growth in demand for Chinese exports, which means that China must rely on domestic demand to revive its economy.
Second, China’s asset market is still in the doldrums, restricting any expansion in consumption.
Growth in housing prices suffered a sharp downturn from 11.3 percent in January last year to minus 0.4 percent in December and a further drop to minus 0.9 percent in January. Apart from this, China’s stock market indices fell by about 70 percent last year, and although they have seen a slight rebound this year, they are still struggling.
Finally, in terms of government expenditure, the annual growth rate for national fiscal income averaged 19.2 percent from 2000 to 2007. Last October, however, national tax revenue showed negative growth at minus 0.3 percent, the first occurrence of negative tax revenue growth since 1996. National tax revenue in January fell 17.1 percent year on year.
The Chinese government will have to deal with a deficit of 950 billion yuan this year, or 3 percent of GDP.
Unless foreign demand picks up quickly, fiscal policy and monetary expansion will only be able to solve China’s more urgent issues. These measures will not be sustainable in the long term.
Tung Chen-yuan is an associate professor in the Graduate Institute of Development Studies at National Chengchi University.
TRANSLATED BY PERRY SVENSSON
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