Economists have no doubt that the Chinese Government's massive spending plan to some extent will put the slowing economy back on firmer ground. But there is less agreement on how effectively it will offset sagging exports and consumer inactivity. They also question whether the stimulus package can help rebalance the country's growth model. Louis Kuijs, a senior economist with the World Bank, discussed these issues at a press conference on November 25 in Beijing. Excerpts follow:
The impact of the global downturns on China's economy has been manageable so far, but is expected to intensify. China's financial system is relatively insulated from the international distress, but the real economy, opened to the world, has obviously felt the pain. The overall export growth has until recently held up due to strong demands from emerging markets and gains in global market share reflecting the country's strong underlying competitiveness. However, global risk-aversion and deleveraging are certain to trigger a funding squeeze that depresses demands in many countries.
Domestically, private sector investment is likely to be weighed down by the gloomy external prospects and a continued weakness in real estate markets. The private sector will be reluctant to expand and may even increase layoffs, amid a dark outlook for exports. In the meantime, inflation is coming down steadily, giving some breathing space to the economy. No signs of deflation have surfaced.
Since the summer of 2008, the authorities have taken several steps to fuel growth, culminating in November with a 10-point plan to widen domestic demand. The emphasis will be on accelerating infrastructure and other investments, although of a different nature than in the wake of the Asian Financial Crisis, with many projects focusing on broad long-term development and improving living standards. The GDP growth for 2009 is estimated at 7.5 percent, with more than half of that coming from government-influenced spending. The U.S. economy is likely to start bottoming out in the first half of 2009, delivering a turnaround to the Chinese economy in the second half.
What China could do to help recover the world economy is to keep its own economy growing well. Also, it would be in China's interests to buy foreign treasury bonds to finance the rescue packages of other countries since China still sees a growing trade surplus.
The stimulus policies fit well with China's long-term development objectives as it blesses the country with a good opportunity to rebalance its growth model. Some of the stimulus measures give some support to the rebalancing of the growth pattern from investment, exports and industry to consumption and services. The government can use the opportunity of the fiscal stimulus package to take more rebalancing measures, including ones on energy and resource pricing, health care, education, and the social safety net, as well as financial sector reform. |