Published November 11, 2008

FLASHPOINT: CHINA
Changing tack to stay on track

It is now reheating economic boilers and switching to domestic-led growth

By ANTHONY ROWLEY
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CHINA's economy went into the global crisis rather like a runaway train with the engine driver furiously trying to reduce steam so that excessive speed would not lead to a derailment.

Gloom in the background: The government has taken a proactive stance on the fiscal front to prevent the economy from cooling too much amid slowing exports and cooling domestic demand

Faced with a worldwide slowdown, however, Chinese authorities are seeking to fire up the boilers again. The scale of China's economic stimulus became clear last Sunday when the world's fourth-largest economy approved four trillion yuan (S$870.4 billion) in new government spending between now and 2010, focused largely on infrastructure and social projects.

The move will have a positive impact upon the global economy, said IMF managing director Dominique Strauss-Kahn. In addition, 'the People's Bank of China (PBOC) has cut interest rates three times in the past two months and reduced reserve requirements twice', Asian Development Bank senior economist Zhuang Jian told BT from Beijing.

The central bank has also eased commercial banks' lending quotas. 'These are very big changes compared to the tightening of monetary policy announced at the beginning of this year,' said Mr Zhuang. The Chinese government has also taken a proactive stance on the fiscal front in order to prevent the economy from cooling too much in the face of slowing exports, cooling domestic demand and problems in China's residential property market.

'On fiscal policy, we have seen the government announce several measures that will increase investment in the railways in China,' Mr Zhuang said. 'The authorities are also preparing to increase investment in expressways, ports and other transport-related projects.'

Maintaining smooth economic expansion in China is essential for social and political as much as purely economic reasons. China is also seeking to move from export to domestic demand-led growth.

Speaking in Washington last month on the sidelines of the IMF and World Bank annual meetings there, PBOC deputy governor Yi Gang forecast that China's GDP growth would slow only from an expected 10 per cent this year to 9 per cent in 2009, based on the assumption that domestic demand can be stimulated sufficiently to compensate for an expected fall in exports as the global economy slows.

In a special update of its World Economic Outlook published last Thursday, the IMF forecast that China's economy would grow at a rate of 9.7 per cent this year and 8.5 per cent in 2009. 'I hope that growth will come mainly from domestic consumption,' Mr Yi told BT.

He claimed that China's banking and financial sector is in a very strong position to withstand the global shock waves. China's five major banks have been reformed and most of them recapitalised, he noted, while 'capital to asset ratios are at an historical high' in the banking system. Mortgage markets are buffered by high downpayment requirements, Mr Yi said.

Asked about China's banking system, Mr Zhuang also said that 'right now I think it is sound'. 'If the current situation - especially the property market - cannot be stabilised, then later on there may be some non-performing loans.'

But the banks have enough capital to withstand this.

Mr Yi noted that China's overall GDP growth in 2008 should reach 10 per cent, declining only slightly in 2009. Inflation should meanwhile fall from 5 per cent in 2008 to 3 per cent next year, he suggested. ADB has forecast that China's GDP growth would reach 10 per cent this year and 9.5 per cent in 2009.

'Right now, we have no official view, but my personal view is that we should revise down a little these projections,' the ADB's Mr Zhuang told BT. The reason for the projected slowdown is chiefly exports which have recently seen a sharp slowdown.

To offset the weak demand from the US, Chinese authorities would like to speed up some projects planned in the eleventh five-year plan. 'The government is also trying to invest in some kind of low-price housing and low price houses for renting to support real estate development,' said Mr Zhuang.

In addition, China could introduce tax reductions from the beginning of next year, he added.

The PBOC's Mr Yi also suggested that the global slowdown would impact China 'through the trade channel' and the current account. He acknowledged that 'exports have to slow down, especially given the 'aggressive' appreciation in the real effective exchange rate of the renminbi'.

China's export surplus will decline from its current level of around 10 per cent of GDP to 8 per cent and then down to 6 per cent or even 4 per cent, but this decline will take place over a period of three to four years from now, Mr Yi said. During this time, Chinese authorities would have the chance to develop domestic demand to offset the export decline.

How China will pay for these infrastructural and social upgrades is something that is still under discussion. 'One way is to use actual fiscal revenue this year to materialise the stimulus measures,' said the ADB's Mr Zhuang. 'Others suggest that the government can take proactive fiscal policy - meaning to issue special Treasury bonds to support investment projects. That depends on what the fiscal revenue is like this year.'

Economists are confident that China can manage the transition from export-led to domestic driven growth and from existing centres of prosperity to more rural areas. Some of China's inland provinces are now growing at a faster rate than the export-oriented coastal zones, noted prominent German banker and former deputy finance minister Caio Koch-Weser.

This is the 4th in our series of stories on how some other countries - especially Singapore's major trade and business partners - are coping with the financial crisis