The stimulus package announced by the Chinese authorities this week tells us three important things about China’s economy.
First, China’s economy is in some trouble. China is the world’s biggest exporter of goods, and with nearly half of those exports going to Western countries whose economies, the IMF says, are going to shrink next year for the first time (as a group) since the late 1930s, a significant slowdown in exports is inevitable and unavoidable. Unfortunately for China, this slowdown has arrived in time to coincide with a property market slump, induced by the progressive tightening of monetary policy by the People’s Bank of China over the past couple of years. (There’s a parallel with Australia here).
Second, the Chinese authorities are prepared to “do whatever it takes” to put a floor under their growth rate (there’s another parallel with Australia, except that the targeted “floor” is 8% for China, as opposed to 2% for Australia). The Chinese authorities’ biggest nightmare is the social unrest that might accompany sharply rising unemployment among the millions of people who, every year, migrate from China’s still-impoverished interior to the cities of the east coast and the Yangtze valley in search of work.
So they will, to the maximum extent possible, seek to create work for those people, and for those already in the cities who are now losing their jobs as export-oriented factories close down or construction projects cease. Because China is entering this global downturn with a relatively strong fiscal position and relatively tight monetary policy (yet another parallel with Australia), they have more scope than most countries to use the traditional instruments of economic policy in an endeavour to cushion the effects of the global downturn and the property slump.
Third, such details of the package as have been provided serve to remind outsiders that notwithstanding its extraordinarily rapid growth over the past three decades, China remains a relatively poor country (with a per capita GDP at purchasing power parities in 2008 according to the IMF of just under US$6,000, compared with US$37,500 for Australia and US$47,000 for the US, and ranking 101 out of 180 countries for which such estimates are available), and there is enormous scope for spending on housing and basic infrastructure to improve people’s lives, as well as create jobs and lay the foundations for further economic growth in the decades ahead.
The stimulus package also reminds us that the Chinese authorities aren’t above using a few of the “tricks” used by governments which have to face the judgement of an electorate from time to time, such as “repackaging” measures which have been announced before, and rolling up spending which will take place over a number of years and inviting comparisons of the total with a single year’s GDP. Some estimates suggest that of the 4 trillion yuan of spending contained in this weeks package, “only” 500 billion represents new spending.
If that’s correct — and that is the harshest assessment I’ve seen — then there will eventually be more genuine spending, consistent with the Chinese authorities’ determination to ensure that their economy continues to generate jobs; and also, as with their response to the Asian crisis a decade ago, to portray China as a stabilizing force for the regional and global economy in turbulent times.
Such spending will, by its very nature, be “commodity-intensive” and thus of at least some benefit to Australia — although that needs to be seen in the context of the magnitude of the decline in commodity demand which is now occurring as a result of the global economic degringolade that is now unfolding.