Prof. Dr Fan Gang

Adaptation of the Article China Confronts the Global Meltdown by Fang Gang in A World of Ideas of Project Syndicate conference.

For three decades China has been growing at an average annual rate of 9.8%. For most of the time the world market were favourable with no major global economic or financial crisis or slowdown. Of course there were some turmoil in Southeast Asia in 97, Japan in 90s and America in 2000 but none of them proved to be a serious obstacle by China’s long boon. But the past three months have been a great challenge for the men at the helm of the Dragon throne with a significant slowdown in China’s exports, domestic investment, industrial output and tax revenues. But a clear study will show that it was home made as subce 2004 the Chinese government has sought to cool an overheating economy by bringing the growth from 12% to 8 % plus for sustainable growth.

China has been able to maintain growth over the past 30 years is that it started counter cycle macroeconomic intervention during the boom times, rather than wait for a collapse. The Chinese never believed that it should leave what happens in the economy solely to the marjet. When there is no big bubble, there is no need to worry about the big crisis.

China`s economic growth is fundamentally sound. All the factors that encourage high growth remain in place; low labour costs, education high savings, improving infrastructure, and rapid urbanization. Moreover, China’s fiscal position is one of the best in the world. Government deficits rarely exceeded 3 % of GDP in past decades, and there were surpluses in recent years.

Monetary policy has been prudent, and the threat of inflation has now been lessened by the decline in commodity and oil prices. Official foreign exchange reserve will soon reach US $ 2 trillion. The policy makers have ample room to manoeuvre if anything should go wrong.

The recent $568 billion fiscal stimulus package which will be spent on railway expansion, subway construction, low budget housing programs for the poor, irrigation system, rural social security, and health care will add a few percentage points in growth over the next couple years. With the monetary policy and some of the administrative controls on investment and local spending being relaxed, the slowdown should be brief.

So far the good news and now the darker side is that low consumptions remains a big weakness. Household consumption only accounted to 34% of the GDP and total consumption is less than 50% in 2007. This is institutional and cannot be easily corrected.

So, with the domestic economy basically secure, is there anything /China can do in helping the world economy? If China can manage to maintain real growth at 8% per annum over the next two years emerging markets may be able to grow at 4%.  That may prevent the world economy from falling into recession. It looks that China may play the role of growth anchor.

But china should not be expected to do too much more. World financial stabilization for example, is not something China can do much to help directly. China played little part in the global derivatives markets, and does not have much toxic securities to clean up or banks to save in order to unfreeze credit flows.

China is also considered unsuited at the moment to play a central role in reforming the global financial and monetary system in 2009 because it has not yet fully liberalized its capital accounts and financial system. So Chinese negotiators would rather play a supporting role and let others, both developed and developing countries, take the lead in most issues concerning risk control and regulations.

But China is likely to increase its voice on one issue= the US $ status as the global reserve currency. China has been criticized in the past for allegedly manipulating its exchange rate, because it did not revalue its currency as much as the US demanded. Hence China would like to see the amendment of the IMF that disciplines American money supply and debt accumulation. In china’s view, it is not enough merely to require others to accommodate themselves to dollar devaluation.

China as a developing country with $ 2,500 per capita income and 35% of its labour force still in agriculture, where workers earn only about 4600 per year China`s domestic problems remain enormous. Thus development will continue to be the top priority.

The good news is that China recognizes how much it has benefitted from the marketization and openness of the past 30 years. There is no turning back on its path toward full involvement in the global market, despite the current crisis. Indeed, the real challenge for China in the year ahead will be to find ways in deal with growing global protectionism as the financial crisis and economic recession bite over deeper in the main foreign markets.

The author Fan Gang is the Professor of Economics of Peking University and Chinese Academy of Social Sciences and director of the National Economic Research Institute of China Reformed Foundation.