Home' Australian Resources and Investment : March 2010 Contents 108 • MARCH 2010 • AUSTRALIAN RESOURCES & INVESTMENT
truly global, whereas the Asian crisis was confined to Asian economies.
Second, China's currency has appreciated more sharply this time, making
Chinese exporters much less competitive.
2. DOMESTIC SECTORS
The asset quality, profitability and capital adequacy of Chinese banks
have all improved remarkably since the Asian crisis, with cleaned-up
balance sheets and less leverage. This means that China does not need
to cut back lending -- in fact, they are pumping liquidity into the
Chinese firms are much stronger after reforms to enhance state-
owned enterprise (SOE) corporate governance and to encourage the
private sector to play more of a role in the economy. A decade ago, the
majority of SOEs were barely profitable or struggling for survival.
Households are also better positioned today, with household bank
deposits increasing fivefold over the last decade. Increased wealth has
increased household consumption, which was surprisingly strong in
Due to a stronger government coming into the current crisis, the
policy responses have been more powerful and proactive than they were
a decade ago. The fiscal stimulus package is now more aggressive, and
has been designed more carefully to reduce precautionary savings and
to encourage households to spend.
3. MORE AGGRESSIVE MONETARY POLICY
The People's Bank of China shifted its monetary policy from "tight" to
"modestly accommodative" in November 2008. This is more aggressive
than the policy shift from "modestly tight" to "prudent" in 1998 after
the Asian financial crisis. Banks and firms are much healthier today, and
the transmission mechanism of monetary policy is now more efficient
after years of monetary and financial regime reform.
"...we expect China's real GDP growth to reach 10.5 percent in 2010
and 9.8 percent in 2011."
REAL GROWTH ENGINE OF CHINA'S ECONOMY
On the surface, China's economic growth is heavily dependent on
exports, as shown from the high and rising ratio of merchandise exports
to GDP. This rise, however, has been accompanied by a synchronised
rise in the ratio of imports to GDP.
This parallel growth is due to China's assembling and processing of
components imported from other nations, and then exporting them.
When demand for these products shrinks, imports are reduced.
The contribution of net exports to GDP growth has been almost
negligible since 1990. Over 1990 -- 2008, China's real GDP growth
averaged 10.0 percent, but net exports, on average, contributed only
0.9 percentage points per year to GDP growth (see Figure 4). The real
driver of this growth has been domestic demand, with investment
contributing 4.1 percentage points per year, followed by private (3.7
percentage points) and government consumption (1.3 percentage
points) (NBS, 2009).
A decline in the export sector may be accountable for some injury
to GDP growth in the form of reduced investment and job creation.
Analysis suggests that the export sector represents a significant share
of China's real economy, but not as large as the ratio of exports to GDP.
Therefore, the direct and indirect impact of a major decline in exports
on China's economy should be significant, but manageable.
DRIVERS OF CURRENT ECONOMIC DOWNTURN
Massive destocking, rather than falling exports, caused the sharp
slowdown in China's economy from mid-2008.
China's industrial production growth fell sharply from 17.8 percent
year-on-year in March 2008 to only 3.8 percent in February 2009.
Falling exports explain only 3.1 percent of this, while the remaining
10.9 percent can be explained by falling domestic demand.
Interestingly, domestic final demand actually strengthened over that
period, which implies that falling intermediate demand (i.e. destocking)
was the main cause of weaker domestic demand growth. Once
destocking finishes, strong domestic final demand should return and can
be expected to boost industrial production and GDP growth.
We expect China's real GDP growth to start moderating again in the
second quarter of 2010, given that no V-shaped recovery can last
forever. Overall, we expect China's real GDP growth to reach 10.5
percent in 2010 and 9.8 percent in 2011.
1 Chief China Economist, Nomura International (HK) Limited, Hong Kong. Email:
AU: Mingchun Sun
TI: China: Unscathed through the Global Financial Tsunami
SO: China & World Economy
CP: © 2009 The Author Journal compilation © 2009 Institute of World
Economics and Politics, Chinese Academy of Social Sciences
AD: Chief China Economist, Nomura International (HK) Limited, Hong
Kong. Email: firstname.lastname@example.org
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