Column International Exchange 2009.09.07
The week after China released its main economic indicators on July 16, the author visited Beijing and Shanghai to engage in a frank exchange of views with economists and others. Two views that suggested a strong recovery of the Chinese economy stood out.
1.Short Term View
China's GDP growth rate for the second quarter of 2009 was 7.9%. That growth rate exceeded most expectations. Back in April and May of this year, many economists expected the second quarter growth rate to be in the 6% range, following the fourth quarter of the last year (GDP growth rate of 6.8%) and the first quarter of this year (6.1%). Some even held the view that due to the increase in inventory of steel and other goods, the economy, which was once on a path to recovery, could lose its steam and hit bottom again. On June 24, however, the China People's Daily ran an article in which an economist from the National Bureau of Statistics of China stated that he expected that the second quarter growth rate would be close to 8%. Thereafter, the growth rate forecast was revised upward. The 7.9% figure was not much different from the market forecast just before the official statistics were announced. However, it was a much bigger number than the forecast before the China People's Daily article.
Until the 7.9% figure was announced, central government officials responsible for macroeconomic policy had forecast this year's growth in the 7% range, but they are now convinced that it will achieve the 8% range and have revised the forecast accordingly. I was struck by the fact that my economist friend, who is usually reserved and cautious, confidently stated, "There is no doubt that China will continue its rapid growth for the next two to three years."
Since the global financial crisis triggered by last September's Lehman Shock, in order to sustain China's economy, the Chinese government has launched a four-trillion-yuan stimulus package and implemented a policy to ease the money supply to vigorously stimulate lending. This crisis having been the first significant adverse challenge China had faced since the Open Door Policy in 1978, Chinese officials must have been very nervous about whether these economic stimulus policies would be effective. Those responsible for macroeconomic policy now seem to be relieved by the fact that they are beginning to see the end of the tunnel.
2.Long Term View
When Chinese government officials were asked what would be the minimum economic growth rate necessary to maintain China's social stability, until the end of last year, they used to respond, "7%." When I asked the same question during this trip, they responded, "Less than 5% would be dangerous." This indicates that the threshold has dropped by 2%.
The Chinese economy had been expanding very rapidly over a long period time, so companies focused, first and foremost, on expanding their production and sales capabilities, as well as on new markets, rather than on enhancing production and management efficiency. Since last year's global financial crisis, however, the Chinese economy has been adversely affected. Many export manufacturing companies faced sharp declines in sales and, as a result, many became bankrupt. Under such difficult circumstances, in order to survive, companies endeavored to improve their production and business efficiency by drastic restructuring. As a result, they saw improvements in corporate profitability and more companies are ensured of a certain level of profitability an d can retain employees even if the economic growth rate is lower. Thus, the minimum economic growth rate needed to maintain the stability of Chinese economy has decreased. This means that there is more room for stable growth without the need to take excessive measures. Thus far, the structure of the Chinese economy had been such that, to achieve the 8% growth that was regarded as required to maintain a steady level employment, economic stimulus measures were required. These measures, in turn, led to an overheating and bubble in the economy. Now, the economy has been transformed so that stability in levels of employment can be achieved without taking excessive stimulus measures. This indicates that, over the long term, the stability of the Chinese economy has improved.
As described above, the Chinese economy now has almost overcome the short run stagnation brought about by the global financial crisis, and is securing the basis for stable growth in the long run. Although in the mid- to long-term, there are still some significant risks, China almost has overcome its immediate, short-term problem.
For further details on this report, please read "The Chinese Economy Is Likely To Achieve 8% Growth Despite Adverse Conditions-A Report From the Visit To Shanghai and Beijing."