The Secret Behind China’s Success

The Secret Behind China’s Success

During the tumultuous period of the world fnancial crisis, China’s economy sank, struck bottom and rebounded as its GDP in 2009 reached 8.7 percent, far beyond global expectations. But why has China succeeded so rapidly and what lessons can people draw from the experience? In his recent article China’s New Deal: How to Response to International Financial Crisis, Hu Angang, Director of the Center for China Studies of Tsinghua University discussed these issues. Edited excerpts follow:

Advantages

Since the mid-1990s, China began to accelerate its integration with the world economy, thus exposing itself to the impact of the changing international economic situation. It has withstood at least two major external impacts: One was the 1997-98 Asian fnancial crisis and the other was the 2008-09 international financial crisis. The former crippled China’s export growth to 0.5 percent and foreign direct investment (FDI) growth to 0.4 percent in 1998. The latter resulted in negative growth rate for China’s export sector for the frst time in the nation’s history. It also caused a drop in FDI.

But the 2008-09 fnancial crisis was global, rocking China and the whole of Asia. Yet, as seen from the internal system, the aftermath looked much better than 10 years ago and has provided favorable conditions for resisting external impacts. The resistance to external factors is the result of major achievements in China’s reform and opening up over the past three decades. This can be seen from the following fve aspects:

First, in terms of economic scale, 2008 GDP was 2.5 times that of 1998 if calculated by the constant price. The bigger the economy, the stronger its capacity against external impacts. This is a“big power advantage” as well as the advantage of domestic development scale.

Second, foreign exchange reserves reached nearly $2 trillion at the end of 2008, 13 times that of 1998. This has been the main economic strength against the fnancial crisis.

Third, Chinese businesses, especially state-owned enterprises, have risen rapidly as opposed to the situation 10 years ago. State-owned enterprises were inefficient in 1998. With sales margins lingering around only 2 percent, they were mostly in the red. In an extremely diffcult position, they had to lay off large numbers of workers. But, by 2008, the sales margin of state-owned enterprises rose to 7 percent, more than triple that of 1998.

Fourth, the state-owned commercial banks were almost bankrupt in 1998 as their non-performing loan ratios reached as high as 40 percent. But now, their nonperforming loan ratios have dropped to 2-3 percent and the proftability from assets reached 17 percent in 2008, with the pretax proftability reaching 30.6 percent.

Fifth, China’s fscal revenue reached 6.1 trillion yuan ($900 billion) in 2008, 6 times that of 1998, while the fiscal deficits of the year accounted for only 0.4 percent of GDP. The Chinese Government has thus had the capacity of fnancing the defcits by issuing treasury bonds to expand fscal expenditures as a way of resisting fnancial crisis.

The resistance to external factors is the result of major achievements in China’s reform and opening up over the past three decades

China’s economic growth is determined by internal factors, with the external impact becoming secondary, even if it was more severe than in 1998. This indicates that China has been, from the very beginning, more advantaged than the other G20 members in leading the economic recovery. It is capable of not only reducing the external infuence to a minimum but also translating crises into opportunities.

Road of China

China now has a fairly sound and effcient macroeconomic decision-making mechanism. On November 5, 2008, not long after the outbreak of the U.S. sub-prime crisis, Premier Wen Jiabao called an executive meeting of the State Council, which decided to adopt measures to boost domestic demand in order to bring the economy back on the steady and fast track. The stimulus package they developed covered 10 measures, involving an investment of 4 trillion yuan ($586 billion). On May 21, 2009, the National Development and Reform Commission released the composition of the 4-trillion-yuan stimulus package.

In order to keep the economy in check, realize the objective of ensuring 8-percent GDP growth (in 2009), speed up industrial upgrading and further optimize the industrial economic structure, the State Council also mapped out a development plan for 10 major industries, covering textiles, iron and steel, automotive, shipbuilding, equipment manufacturing, electronics and information, light industry, petrochemical, logistics and non-ferrous metals. That was followed by another development plan for the cultural, tourism and forestry industries. Now preparations are under way to work out an energy-effcient and environmental protection plan.

China was swift in its response to breaking events, resolute in making policy decisions, bold in investment, and decisive in execution. Going against the tide, the Chinese Government was the frst to come out with its “new deal”—the 4-trillion-yuan stimulus package. For this purpose, the state had to increase fiscal deficits and expand the issue of treasury bonds, thus encouraging other countries to produce their own “new deals.”

Although China was not alone in the global fnancial crisis, it could stand out to lead the world to recovery. This buttressed the confidence of the whole country and even the world. As Mr. Haruhiko Kuroda, President of Asian Development Bank, said, the stimulus package will effectively uplift China’s economy, and the 8-percent growth objective is an encouraging expectation, even with the financial crisis sweeping the globe.

A ‘new deal’

China’s “new deal” has its particular Chinese characteristics. With government investment as the guide, the package has stimulated an investing spree. In 2009, the fixed assets investment reached 22.5 trillion yuan ($3.3 trillion) and it is expected to reach 27 trillion-28 trillion yuan ($3.97 trillion-4.11 trillion) by 2010. The total fixed assets investment this year and the next could reach about 50 trillion yuan ($7.35 trillion). This is the largest investment in the world up until now.

The government investment only accounts for 8 percent, mainly used for public service consumption and public investment in infrastructure. By stimulating the non-governmental investment, the government aimed at encouraging private products and services. The two products and services are different in nature and the providers are different, too. They are not inter-replaceable and yet are mutually complementary, with an interactive effect instead of a crowding out effect.

The government investment is mainly oriented toward projects concerning the livelihood of the people, the rural areas, the farmers and agriculture as well as infrastructure, environmental protection, energy conservation and emissions reduction. It will also be used to accelerate economic structure adjustments and changes in the economic development model.