China a Key Engine of Global Economic Growth

HU JIANGYUN

ITS four years since the onset of the global financial crisis, and the extent to which the world economy stays afloat on Chinas economic buoyancy has grown only more pronounced.

The cyclical nature of Chinas economic growth over the last two decades can be seen in the table on page 53.

From 1992 to 2011 the Chinese economy went through two cycles, with troughs in 1997-1999 and 2007-2009. In the wake of the Asian financial crisis, Chinas GDP growth dipped from 8.8 percent in 1997 to 7.8 percent in 1998 and then to 7.1 percent in 1999. The slide was halted the next year, but it was not until 2002 that the solid growth trend of the upswing really took hold.

Under the weight of the latest global financial crisis, Chinas GDP growth fell from a supercharged 14.2 percent in 2007 to 9.6 percent in 2008 and then to 9.2 percent in 2009. It rose back to the above 10 percent mark the following year, but slipped below it again in 2011. Looking at the quarterly figures, from the first quarter of 2007 till the last quarter of 2011, the first quarter of 2009 registered the lowest rate of growth – 6.61 percent. This coincides with the exceedingly grim performance of the world economy at the time.

The true extent to which China buoys the world economy revealed itself in 2010. During that year the world economy grew by 4.9 percent, a fall of 0.8 percent from the previous year. The worlds biggest individual economies, the EU and the U.S., grew by 1.8 percent and 2.8 percent respectively. Over the same period, China, the worlds third largest economic entity, managed to maintain a growth of above 10 percent in every quarter.

The nature of Chinas economy at present –heavily involved in and dependent on trade –means the country has intimate and far-reaching economic links with the rest of the world. Its obvious, then, that without Chinas strong economic performance in the years following the financial bust of 2008, the global economic situation would have been considerably worse.

Chinas strong performance in the wake of the crisis was no miracle. Smart policy was the hero of the day.

The Chinese government adopted a proactive fiscal policy and moderately loose monetary policy through issuing more treasury bonds, the volume of which jumped from RMB 5.28 trillion in 2008 to RMB 6.7 trillion in 2010.

Investments in fixed assets were also sharply increased, from RMB 13.73 trillion in 2007 to RMB 27.81 trillion in 2010. Over this period, the proportion of investment in Chinas GDP steadily expanded, from 51.66 percent in 2007 to 69.32 percent in 2010. Correspondingly, the contribution of gross fixed capital formation to GDP rose from 42.7 percent in 2007 to a peak of 95.2 percent in 2009, before easing to 54 percent in 2010. By measure of percentage points in the overall GDP growth figure, Gross Fixed Capital Formation accounted for 6.1 percent in 2007, 4.6 percent in 2008, 8.7 percent in 2009 and 5.6 percent in 2010.

Atop these measures China put forward a plan to overhaul and rejuvenate 10 industries, galvanizing domestic and international markets through both trade and investment.

The effects of Chinas cogent financial policies and its strong economic performance were felt beyond its borders.

Links between the Chinese and world economies intensified after China joined the WTO in 2001. China is now an integral player in the global economy and is subject to its influences.

In seeking solutions to a serious financial crisis, countries around the world have expressed their will for greater collaboration and coordination. In addition to policies and programs introduced by individual governments, major economic bodies and international organizations conducted extensive exchanges and cooperation across a broad spectrum of economic issues on a number of occasions, key events of which were G20 summits.

All were meant to contribute to halting the global economic freefall, but contrapositions were mixed. It is unfortunate that the Eurozone failed to adopt the unified fiscal policies earlier on, a failure that crippled its ability to respond to the crisis.

The world applauded Chinas proactive approach to the global crisis. Here proactive means the willing use of the governments fiscal and monetary toolbox – “government interference,” as its disparagingly been called.

Government help to steer the economic ship was also critical to Chinas recovery from the Asian financial crisis in 1998. But the 1998 crisis was vastly different to the 2008 one, and these differ- ences demanded policy tailored to the moment.

At the time of the Asian crisis, the major propeller of growth in China was final consumption expenditure, responsible for 57.1 percent of Chinese GDP in 1998, 74.7 percent in 1999 and 65.1 percent in 2000. During these years price levels were low and global deflation was obvious.

In the recent economic meltdown consumption played a smaller role, standing at 43.5 percent of GDP in 2008, 45.4 percent in 2009 and 36.8 percent in 2010 respectively – 10 points below the figures from a decade ago. While GDP growth rates slid, world commodity prices soared across the board, and key production materials were subject to wild price swings. An understanding of the differences between the crises was crucial to formulating government responses.

Nevertheless, China has come to the understanding that its economic development is unsustainable if it relies solely on government investment, the prevalence of which may have been“crowding out” private capital.

Based on this understanding, in its 12th Fiveyear Plan the Chinese government has vowed to transform its mode of economic development. This will be backed by further reforms and opening-up. China is also to give freer reign to market mechanisms in order to effectively optimize the market allocation of domestic and international resources.

As globalization roars along, Chinas social and economic issues are no longer divorced from the rest of the world. Rather, the vicissitudes of Chinas domestic changes have repercussions everywhere, as seen in the evolution of the global financial crisis. In handling its economy, the Chinese government therefore has to think from a global perspective, utilizing both market mechanisms and macroeconomic regulations to steady the balance between investment, consumption and trade.