China’s Economy Weathers the Storm

5 October 2009 - Last week, China marked the sixtieth anniversary of the founding of the People’s Republic, which was an important historical event by any reckoning.  It is curious to note that while in most of the world, communist parties have been pushed into fringe status; in China one-party rule is still supreme.

Historically, the Communist Party has been the vehicle for transforming China from being an economically backward and politically fragmented country, preyed on by imperialist powers, into an economic powerhouse and major actor on the global geopolitical scene.  An examination of the record of the past sixty years reveals both egregious errors and successful pragmatic decisions, free from ideological shackles.

In the nineteen thirties, it was not at all clear that the Chinese Communist Party (CCP) would succeed.  The Soviet Union, under Stalin, had made a deal with the imperialist powers of the day and withdrew support for the CCP, encouraging it to cede ground to the nationalist Kuomintang.  Drawing on Marxist theory, the reasoning given was that China was too backward, lacking an industrial proletariat to stage a socialist revolution.  Mao Zedong and the leadership of the CCP rejected this interpretation, relied on the peasantry for support and successfully took power in 1949.

The CCP is still in power today because unlike its counterparts in many other countries it was capable of recognising past errors, though not in public, and changing course pragmatically.  The market-based economic reforms that were started some thirty years ago have radically transformed the economy, delivering exceptionally rapid growth.  There has been an unwritten bargain with the population; offering rising living standards, some social and cultural liberties but no political freedom.

The leadership has focussed on delivering the goods and maintaining social consensus. After the sharp global economic downturn, last year, it implemented a massive stimulus package to ensure that the Chinese economy’s rate of growth would not slacken substantially.  The evidence from the data is that they have been successful in this regard.

Last year, there were many who doubted that government measures would prevent a sharp fall in the growth rate.  Well, exports did indeed decline dramatically as the global recession bit deeper.  There were lots of layoffs and large numbers of migrant workers were displaced.  But there also appears to have been a sufficient generation of domestic demand to prevent large-scale distress.  The fear that there would be social disturbances has not been borne out.  Trouble in Xinjiang was related to long-standing Uighur grievances rather than the economic downturn.

Going forward, the authorities don’t want to take the risk of any possible slackening of growth and are intent on maintaining the stimulus measures to secure the recovery.  This policy stance isn’t any different from that adopted in many other countries and raises the issue of an exit strategy when the time comes to wind down the stimulus.  A timing mistake is always possible, but Chinese policymakers are far better placed than their counterparts in other countries, where government fiscal challenges are considerable.

As for China’s political system, all is not sweetness and light.  There is inefficiency created by the many tiers of government.  People are frustrated by too much bureaucracy, as well as considerable corruption, at the local and provincial levels.  Rapid economic growth may be creating the opportunity for corruption to flourish.  But, thus far, the central authorities have not been the focus of the population’s anger, which is directed at lower levels of government.

China’s composite leading indicator has been rising sharply since last November, indicating that the rebound is on track.  Meanwhile, the manufacturing PMI (purchasing managers’ index) is also increasing and has held above the 50 level since March, signifying expansion. 

Industrial production is rebounding on a year-over-year basis, and retail sales growth is holding up well.  So it appears that consumers have responded to the stimulus measures.  The consumer confidence index which fell sharply in 2008, and bottomed in March of this year, has been tracking higher in recent months.

Exports, which had fallen dramatically, as the global recession got under way, have stabilised and will start to contribute to overall growth as the world economy picks up.  Needless to say, interest rates are being kept very low and, as an indication of expansionary policies, the money supply is growing at a much faster rate than nominal output.