Sunday, April 26, 2009

China's bamboo shoots of recovery

Bamboo shoots, or green shoots, or whatever. The signs of recovery in China seem to be much more robust than in the US. In the US, what we have is a deceleration of decline; but in China, some key economic indicators actually had a big rebound. One of the common misconceptions about Chinese economy is the importance of trade. The argument goes since trade accounts for more than 40% of China's GDP, a global economic slowdown led by the US will undoubtedly drag down China. There are certain truth in the argument and we did see China's GDP growth had a dramatic fall, but the 40% share number is deceiving.

According to recent research (see my previous post), China's trade sector, if measured by value added, only accounts for less 10% of GDP. The importance of trade is overly exaggerated. I quote Justin Lin, chief economist of the World Bank: What China is experiencing is a decline of absolute rate of growth (recoupling), but relatively speaking, China is going to grow much faster than all the advanced economies, including the US (decoupling).

According to another research done by Albert Kiedel at Carnegie Endowment, China's GDP growth is almost independent of US GDP fluctuations (see the chart below), at least from 1988 to 2007.

(click to enlarge)

This Economist piece below has a more detailed analysis:

Signs that a giant fiscal stimulus is starting to work

THE Chinese consider eight to be a lucky number because it sounds like the word meaning "prosperity". And luck, combined with a massive fiscal stimulus, may yet help the government to achieve its growth target of 8% in 2009. Earlier this year, most economists thought such growth was impossible at a time of deep global recession, but some are now nudging up their forecasts.


Exports, on the other hand, tumbled by 17% in the year to March and global demand is widely expected to remain weak this year. This is the main reason why some economists expect GDP growth of "only" 5% for 2009 as a whole. But the gloomier forecasts tend both to overstate the importance of exports and to understate the size of the government's stimulus.


If a collapse in domestic demand led China's economy down, it can also help lead it up again. Not only is China's fiscal stimulus one of the biggest in the world this year, but the government's ability to "ask" state-owned firms to spend and state banks to lend means that the government's measures are being implemented more rapidly than elsewhere. To take one example, railway investment has tripled over the past year.


Jonathan Anderson, an economist at UBS, argues that the property market could be as important as the fiscal stimulus in determining China's fate. After falling sharply last year, housing sales rose by 36% in value in the year to March. Housing starts are still down, but if sales continue to strengthen, construction could pick up in the second half of 2009. That would also help to support consumption: about half of China's job losses among migrant workers have been in the building industry.




The biggest task for China is to find a new engine for future growth. It cannot rely on exports, nor can the investment stimulus be sustained for long. Without stronger consumer spending, China's growth will be much slower than in recent years. Reforms to improve health care and the social safety net will take many years to encourage people to save less.
