In the context of the gathering recession, China ’s economic growth rate is estimated to have been 9 per cent in 2008 and is projected to fall to 6-8 per cent in 2009, from 12 per cent in 2006 and 2007, and an average of well over 10 per cent since 2002. The government is seeking to compensate for falling Western demand by encouraging domestic consumption, which accounts for around one-third of total output, and engaging in large-scale public expenditure, mainly on infrastructure, education and health. The government is fortunate in enjoying very strong finances and is therefore in a position to lavish considerable resources on stimulating the economy. The contrast, here, between the debt-laden, cash-impoverished, low-growth Western economies and the cash-rich, fast-growth, surplus-generating Chinese economy could hardly be greater, not to mention the fact that while the Western financial sector is effectively bankrupt, that of China is deposit-rich. This notwithstanding, the problems facing the Chinese economy are severe. In early 2009, it was estimated that 20 million migrant workers had already lost their jobs, with the prospects for those many millions planning to leave the countryside in search of work in the cities bleak. It is possible that the government’s efforts to compensate for the drastic fall in exports and declining foreign investment by increased public spending on infrastructure and social services, together with increased consumer expenditure, will ameliorate the effects of the downturn. Much will depend on the gravity of the recession in the West. If it results in a major contraction in the size of their economies, as seems possible, and if the recession persists for several years, the consequences for the Chinese economy are likely to be severe, with growth rates falling below 6- 7 per cent, and perhaps even lower. In such circumstances, the government might face rising social unrest as unemployment escalates. The most benign scenario is one in which the Western recession is not too deep and relatively short-lived, and the Chinese government’s counter-measures are relatively effective. The most pessimistic scenario is one in which the Western recession bears strong echoes of the slump in the 1930s, both deep and protracted, the US resorts to protectionist measures against China and the Chinese government’s compensatory policies simply cannot cope with the collapse of its exports and inward foreign investment; such an outcome could presage social instability and might weaken the government’s own position.
One advantage that the government enjoys in this situation is that the renminbi is a non-tradeable currency and therefore not subject to volatile movement or speculation. The government has hitherto resisted the temptation to liberalize the capital account and allow the renminbi to float, which would have the effect of enhancing the renminbi’s role, promoting China ’s financial position and making it easier for Chinese firms to invest abroad. The main downside with such a strategy is that the savings which have underpinned China’s huge level of investment might be undermined as savers go abroad in search of rates of return far in excess of the paltry levels they can find at home, thereby denying the country the funds for investment that it has hitherto enjoyed, with the inevitable consequence that the growth rate would decline. In addition, a floating renminbi would be vulnerable to the kind of speculative attack suffered by the Korean won, Thai baht and Indonesian rupiah in the Asian financial crisis. [463] Although Zhu Rongji, the then Chinese premier, intended to begin the liberalization of the capital account in 2000, the Asian financial crisis persuaded him that such a change would be imprudent. The present global financial turmoil only goes to confirm the wisdom of the Chinese leadership in continuing to regulate the capital account, despite persistent calls from the West to deregulate. In due course, a gradual liberalization could well be initiated, indeed there are already clear signs of this, but the Chinese government is aware that the existing system provides the economy with a crucial firewall, especially given its open character and consequent exposure to external events. [464]
