Vanessa Rossi: Give China a break... its economy is saving the rest of us from a slump

China proved, yet again, that it is recession-proof, even withstanding a once-in-a-century global shock

Monday 15 February 2010 01:00

China is well used to the world carping about its economic policies. There is constant criticism of its exchange-rate regime and unfair export advantages, and warnings about the threats from overheating and policy tightening. Such mantras are rarely questioned but they should be as they are often misleading.

Why are we so reluctant to acknowledge China's successful pursuit of stability and growth and the benefit its example has brought to other developing countries? There would be no BRICs without China. Demands for a stronger renminbi may make some sense now but this was not critical in the past.

Throughout the current global crisis, as in previous periods of turbulence, China has avoided recession and maintained financial stability, helping the region as well as itself. Its adherence to the dollar peg and its handling of the economy during the Asian crisis of the late Nineties actually won China grudging praise but notably also elicited harsh scepticism about whether economic growth was real or sham. As the economy clearly started to boom by 2000, the sceptics turned from arguing that China was lying about growth to saying that it was growing unfairly or overheating.

And the sour grapes continue: in late 2008, there were new claims of statistics-rigging and predictions of calamity (especially as electricity output dived) but, by the second half of 2009, complaints switched to the threat of overheating and asset bubbles. It is hard to deny that China has beaten off recession once more. In 2009, the economy grew by almost 9 per cent and is now worth almost $5,000bn (£3,2000bn), surpassing Japan's. Having prudently kept its powder dry in previous years, China did not stint in delivering a stimulus to guarantee this sizzling performance and maintain confidence.

There have been benefits for trade partners as imports revived, bringing China's much-criticised trade surplus down from roughly $300bn (£190bn) to $200bn (£127bn) – 4 per cent of GDP. And provided world markets stabilise, China's exchange-rate policy will go back to a crawling revaluation against the dollar after the freeze put in place during the mayhem of late 2008 – just don't harass Beijing prematurely about this.

So why are the champagne corks not popping for China? While the rest of the world worries about the prolonged chill factor, it seems that China is now too hot for comfort. The world has just come through an unprecedented collapse in trade as well as widespread financial turbulence. Global exports dropped by as much as $4,000bn (£2,500bn) in 2009. In view of this loss, China quickly adopted a large fiscal package and engineered a surge in bank credit, which more than compensated for the loss in trade.

With hindsight, the economy could probably have been comfortably rescued with a more modest package. However, estimating policy responses so precisely, especially in the midst of such chaotic conditions, was impossible. Certainly, no one could accuse China of failing to respond as it put on a formidable display of economic fireworks.

China is now the world's leading exporter, pushing Germany into second place. More importantly, these gains come from improving demand. China is a leading exporter of IT and office equipment, textiles and toys, and it sells increasingly to Asia and other emerging markets, including the Gulf region, as well as to the recovering US economy. Demand for these types of goods and development of new markets have been the key drivers of exports, not a manipulated exchange rate.

So is China now too hot? A significant outbreak of consumer price inflation is unlikely. Although prices are now up nearly 2 per cent year-on-year and heading higher in the short term, such rates are hardly worrying and mostly reflect the rebound from last year's deflation. Other major economies (the US, Europe and UK) are also seeing a rebound to more normal inflation rates (2-3 per cent) but global inflation is not taking off as wage demands remain weak.

The overheating risk, if any, comes from the impact of easy money on asset markets, especially equities and property. China faces a dilemma over how far to tighten policy to control surging asset prices. Indicators point to a very buoyant start for the year and GDP growth could even hit 11-12 per cent in the first quarter before cooling off later in the year. Thus the real economy should do well even if credit is curbed. This lesson has already been acted upon as the authorities have raised prudential reserve ratios for the banks in both January and February, reining in credit expansion. Rocky global markets may also dampen enthusiasm for speculation, making 2010 less frothy for China.

So what lessons can be drawn from 2009? China proved, yet again, that it is recession-proof, even withstanding a once-in-a-century global shock. The view that China is now dangerously close to blowing itself up amid bursting asset bubbles is almost certainly exaggerated.

Through direct quantity controls rather than indirect interest-rate policy, China can very quickly control the credit tap if it needs to, and thus influence asset markets, although controlling asset prices is a bit like trying to hold a tiger by its tail.

China should be given the benefit of the doubt: most probably it will achieve another safe landing even if it has sailed closer to the rocks than usual. Based on its own targets and achievements, its competence can hardly be criticised in the context of the global fiasco of the last two years.

However, China's critics will never be silent. Scare-mongering about asset bubbles and currency manipulation looks set to continue for a while yet, although the threat of European debt crises and collapse of the euro has conveniently taken over the headlines for now.

Vanessa Rossi is an economist at Chatham House

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