Focus: China

The growth of the Chinese economy over the past couple of decades has been spectacular, driven by internal reform and external demand. The country appeared to be on a seemingly endless growth trajectory with many commentators suggesting growth would continue at a stupendous pace, despite the global slowdown..

Recent data, however, indicates China has not decoupled from global weakness and is slowing quickly. Exports declined sharply by 17.5 per cent year-on-year in January, and real estate investment has fallen off a cliff. GDP growth has slipped to 6.8 per cent in the fourth quarter of 2008, a very low figure by recent Chinese standards. Unemployment has risen steeply as factories have closed in southern China. Layoffs have sparked protests by workers, raising the spectre of a period of sustained social unrest.

In response, the Chinese government has announced a series of measures to stimulate the economy. Interest rates have been cut and reserve requirements for the banking sector reduced. Many of the austerity measures imposed to cool the property sector have been rolled back in recent months.

Most significantly, a substantial stimulus package has been announced. This is worth 4trn renminbi (£392bn) over the next two years. The investment package, which is scheduled to be spent before the end of 2010, is focused on key areas of the economy such as transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support. It will be used to rebuild communities devastated by the earthquake in Sichuan province in May 2007, which killed an estimated 70,000 people and left millions homeless. The government has also indicated it will provide further measures to boost domestic consumption.

The Chinese government is in a very fortunate position compared to western governments as debt as a per cent of GDP is very low – roughly 30 per cent – and there is an ocean of savings in the Chinese banking system (about 150 per cent of GDP). The country has also accumulated vast foreign exchange reserves over the past decade, which reached $1,946bn (£1,307bn) in December 2008. The Chinese Communist Party has been described by one commentator as the “world’s most liquid financial institution.”

First, let us consider the urban setting. Various short-term measures, such as tax rebates, primarily benefiting sectors of the economy with low value-added products or facing overcapacity, such as textiles, have been announced. Although in the recent past the government’s strategy has been to move Chinese manufacturing up the value-added ladder, this short-term policy is concerned with keeping people in work. Low value-added industries would have been left to market forces if it had not been for the current financial crisis.

Consumption coupons have been issued in certain cities by local governments to low-income residents over the Chinese New Year holiday. For example, Chengdu, the capital of Sichuan province, has issued vouchers worth 100 renminbi to 380,000 low-income local residents. This may be a more effective means of boosting consumption than income tax cuts, which might only encourage more saving.