Amidst the deepening crisis China's economic strides point to its inherent strong foundation, and more so the Zarnowitz rule…
during the financial crisis of 1997-98 and the
dotcom bust in 2001, pundits were quick to predict a lengthy recovery period on the floor for Asian countries. The stress and turbulence that began to develop in world financial markets in early 2007, and which finally collapsed, plunged the world economy into recession in the final quarter of 2008. That again provided the pundits a perfect platform to come up with the stereotype predictions. Unaware of the resilience of the Asian economies (led by China and India, which are indeed leading the way out of recession) they put forth the argument that export dependent economies could not revive unless customers in the rich world did. Nevertheless, the rebound that the world is witnessing today has largely been ‘Made in China.’
There were some like Shujie Yao, Professor of Economics, University of Nottingham’s School of Contemporary Chinese Studies, who had predicted, “China will emerge from the global recession stronger and more quickly than any other economy.” It is in this context that it is important to analyse how China coped with the recessionary phase and finally bounced back. According to Michael Mussa, senior fellow, Peterson Institute for International Economics, “The slowdown in China’s growth late last year probably owes more to the earlier tightening of Chinese policies and the wind-down from the Beijing Olympics than to global financial turmoil…” However, looking ahead to the fallout of the crisis, the response of the Chinese policy makers was indeed praiseworthy. The measures in terms of fiscal expansion as well as substantial easing of credit conditions helped the economy to bounce back. In the second quarter of the current fiscal, the annual rate of growth surged to 7.9% (the first ever acceleration ever since the financial stress deepened) as compared to 6.1% in the corresponding period last fiscal. Thanks to the government stimulus conditions are definitely improving; the 4 trillion Yuan ($ 585 billion) stimulus plan being implemented by the Chinese government comprises infrastructure spending, tax cuts and various other incentives to induce consumers to buy cars and electronic goods. Along with this the government tackled other industries efficiently to boost employment levels in the rural areas too. This spurt in consumerism and the investment momentum in turn will lead to a virtuous cycle of economic activity.
To make the stimulus plan all the more effective, the government on the other side also exerted pressure on the banking institutions to lend more. The results of the measure (albeit a forced one) has been clearly electrifying; in the last six months the fixed investment spending has increased to 34% ( the fastest rate of growth witnessed in the last five years) while over the same time period the annual rate of money supply has doubled to 28%. What is worth mentioning here is the fact that the Chinese banking and finance system does not have the risky financial instrument, the derivative and asset backed securities (the same innovative financial products which led to the crisis). Furthermore the strong belief of the citizens that their national banks are well capitalised reflected that the foundations of the corporate structure remained strong. In times, when the western economies were wilting, China successfully freed itself of its dependence on exports and developed a more efficient market based domestic economy (much to the surprise of the same pundits who vehemently argued that the export dependent economy could not revive unless the customers in the rich world did). What is evident is that it is the strong foundation, the government aid, economic stability that are the driving forces behind the Chinese success story.
The strength of the economic recovery is what is to be pondered upon. Nonetheless, considering that the economy has been able to heal internal factors, it can be indisputably argued that China has a more solid base to lean on.
during the financial crisis of 1997-98 and the
dotcom bust in 2001, pundits were quick to predict a lengthy recovery period on the floor for Asian countries. The stress and turbulence that began to develop in world financial markets in early 2007, and which finally collapsed, plunged the world economy into recession in the final quarter of 2008. That again provided the pundits a perfect platform to come up with the stereotype predictions. Unaware of the resilience of the Asian economies (led by China and India, which are indeed leading the way out of recession) they put forth the argument that export dependent economies could not revive unless customers in the rich world did. Nevertheless, the rebound that the world is witnessing today has largely been ‘Made in China.’There were some like Shujie Yao, Professor of Economics, University of Nottingham’s School of Contemporary Chinese Studies, who had predicted, “China will emerge from the global recession stronger and more quickly than any other economy.” It is in this context that it is important to analyse how China coped with the recessionary phase and finally bounced back. According to Michael Mussa, senior fellow, Peterson Institute for International Economics, “The slowdown in China’s growth late last year probably owes more to the earlier tightening of Chinese policies and the wind-down from the Beijing Olympics than to global financial turmoil…” However, looking ahead to the fallout of the crisis, the response of the Chinese policy makers was indeed praiseworthy. The measures in terms of fiscal expansion as well as substantial easing of credit conditions helped the economy to bounce back. In the second quarter of the current fiscal, the annual rate of growth surged to 7.9% (the first ever acceleration ever since the financial stress deepened) as compared to 6.1% in the corresponding period last fiscal. Thanks to the government stimulus conditions are definitely improving; the 4 trillion Yuan ($ 585 billion) stimulus plan being implemented by the Chinese government comprises infrastructure spending, tax cuts and various other incentives to induce consumers to buy cars and electronic goods. Along with this the government tackled other industries efficiently to boost employment levels in the rural areas too. This spurt in consumerism and the investment momentum in turn will lead to a virtuous cycle of economic activity.
To make the stimulus plan all the more effective, the government on the other side also exerted pressure on the banking institutions to lend more. The results of the measure (albeit a forced one) has been clearly electrifying; in the last six months the fixed investment spending has increased to 34% ( the fastest rate of growth witnessed in the last five years) while over the same time period the annual rate of money supply has doubled to 28%. What is worth mentioning here is the fact that the Chinese banking and finance system does not have the risky financial instrument, the derivative and asset backed securities (the same innovative financial products which led to the crisis). Furthermore the strong belief of the citizens that their national banks are well capitalised reflected that the foundations of the corporate structure remained strong. In times, when the western economies were wilting, China successfully freed itself of its dependence on exports and developed a more efficient market based domestic economy (much to the surprise of the same pundits who vehemently argued that the export dependent economy could not revive unless the customers in the rich world did). What is evident is that it is the strong foundation, the government aid, economic stability that are the driving forces behind the Chinese success story.
The strength of the economic recovery is what is to be pondered upon. Nonetheless, considering that the economy has been able to heal internal factors, it can be indisputably argued that China has a more solid base to lean on.
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