Home' Australian Resources and Investment : March 2010 Contents AUSTRALIAN RESOURCES & INVESTMENT • MARCH 2010 • 107
Two factors offer a negative answer to this question. First, given
that the global economy has been hit extremely hard and given
the conventional wisdom that China's economy depends greatly
on external demand, the economic recovery is not sustainable
unless the global economy recovers.
Second, after the 1997-1998 Asian financial crisis, it took more
than 3 years for China's economy to reach its trough, showing how
vulnerable China's economy is to external shocks.
However, China's financial, household, public and external sectors
are all lowly leveraged, giving it strong economic foundations to sail
through the global financial tsunami.
CHINA VERSUS THE WORLD: FUNDAMENTALLY
Whereas banks in other countries are being forced to deleverage,
Chinese banks are actually gearing up and pumping liquidity into the
economy, and in many aspects are well positioned to face the global
financial storm and the economic downturn.
First, they have limited exposure to global financial markets and
suffered limited losses at the start of the crisis. Second, most Chinese
banks have cleaned up their balance sheets through recapitalisation and
restructuring in the past decade, and are now much better prepared to
tolerate and deal with potential rising nonperforming loans (NPLs) in an
economic downturn. Third, the banks' leverage ratios are very low after
years of monetary tightening and strict controls on lending.
Chinese households are still in a strong position to spend, cushioned by
their high savings. Household debt amounted to less than 30 percent of
disposable income in China in 2007, a negligible amount compared to
other countries. To most Chinese households, borrowing is still a new
innovation. In a deflationary environment, the real purchasing power of
Chinese households actually improves, meaning household consumption
growth in China should continue even in an economic downturn.
The Chinese government is probably the best positioned among nations
as a result of its healthy fiscal position and low leverage. The Chinese
Government plans a budget deficit of 3 percent to fulfill its pledge to
stimulate the economy with an RMB4.0tn investment package over
2009-2010. The government has the wherewithal to pursue such a
policy every year for at least a decade before its debt-to-GDP ratio
reaches the OECD average of 80 percent. By then, the global recession
will have passed, and private consumption should become a more
important driver of China's growth.
From the beginning of the subprime crisis until early 2009, global
investors pulled money out of the emerging market, causing a sharp
depreciation in many emerging market currencies. However, China has a
solid external position: an enormous current account surplus and
US$2.1tn of foreign exchange reserves, enough to cover its short-term
external debt obligations more than seven times. Therefore, the RMB
has remained firm, appreciating 6.4 percent against the US dollar
between January 2008 and February 2009.
Although currency depreciation might help to improve
competitiveness, a sharp drop could have many adverse effects, which
may far outweigh the benefits of depreciation and make economic
FUNDAMENTAL DIFFERENCES DURING TWO CRISES
After the 1998 Asian financial crisis, China's economy experienced a
"triple dip", with the trough of the economic downturn not being
reached until 3 years after the crisis hit China.
Although China's external environment is more challenging today
than after the Asian crisis, its domestic economic fundamentals have
improved significantly over the past decade, which should help China
avert a protracted slowdown.
1. EXPORT SECTOR
Chinese exporters are facing tougher challenges than they were after
the Asian financial crisis. First, the current crisis is more severe and
Ratio of Public Debt to GDP of Some Countries, 2008
China Korea UK Germany USA France India OECD Japan
Sources: NBS (2009), World Bank (2009) and CEIC (2009).
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