China and the financial crisis: an overview

How China is coping with the financial crisis and the economic slowdown that comes on its heel is a major talking point these days. Radio86 interviewed David Dole, senior economist for the Asian Development Bank office in Beijing.

In the first of a two-part interview, he explains the general outlook on China and the challenges the country faces as it deals with the effects of the financial crisis.

Radio86: How has China been affected by the financial crisis?

David Dole: The Chinese financial sector hasn't been affected like the financial sectors in the US or Europe. So far, there haven't been any major bankruptcies in the financial sector caused by financial instability. The Chinese financial sector is quite different from that in Western countries so it hasn't caused the same problems as in the West.

The impact of the global financial crisis on China has mainly been on the economy and has mainly been through the slowing growth of the US and the Europe, which are some of China's biggest trading partners. Slowing growth there decreases demand for Chinese exports, which have been a big part of the Chinese economy. It's the effect of the financial crisis on the global economy that has caused a slowdown in the Chinese economy.

How well-equipped is China to deal with this slowdown? The World Bank has said that China has “strong macroeconomic fundamentals.” What does that mean?

China has the world's largest foreign exchange reserves. That protects its currency and provides stability to the financial sector. China has very good capital control, so there's unlikely to be a lot of instability caused by capital rushing in and out as, for example, happened during the Asian Financial Crisis back in 1997.

China's government is also in a very strong fiscal position, it's not like the United States which has been running a huge budget deficit. While its hard to know for certain what the Chinese government budget deficit is, it's relatively small. That gives the government a lot of scope for raising deficit spending which is an important part of the stimulus package that was announced last month.

I noticed lately that people are now thinking China is going to be as much a part of the global economic slowdown and sort of less as the savior. They're saying this because they see the weaknesses in the Chinese economy. If the Chinese economy is not strong, it would not be able to boost the economies of other countries.

There have been revisions of China's growth projections. The World Bank has said that next year, China's economy will grow by about 7.5 percent. That's enviable by any other standard. Is it below what is optimal for China?

First, it's important to emphasize what you said. Any other country in the world would be thrilled to have 7.5 percent growth. It's hard to really think of that as a problem. The people who see that as a problem have the idea that lower growth is going to cause some kind of social instability. While there have been some factory closures in the southeastern part of the country and protests from workers who have gotten shut out, I think it's kind of a leap of faith to say that if China has 7.5 percent GDP growth, there's going to be massive social unrest. I haven't seen any clear analysis that says China has to have some kind of minimum economic growth to have a sound and happy society. I don't know about that.

The second point is, while the World Bank has a forecast of 7.5 percent for China's growth next year, there was another forecast of 4.5 percent. The other day, another forecast said that China's economy would grow by 10 percent next year. The fact is nobody knows what's going to happen to China's economy next year, at least not within any kind of reasonable confidence. From 4 percent to 10 percent, that's a big range.

You mentioned that because of the economic slowdown, some factories have had to close. Unemployment will be one of the challenges that China has to face. How should China address it?

I think there are two things for the government to work on regarding unemployment. First is, there are going to be more unemployed. The people who are going to lose their jobs are going to be the lower-paid workers. Those people are vulnerable and they will need the kind of social protections and social insurance that come in other countries, like basic unemployment insurance.

Another part is to focus policy and whatever relevant resources on creating new jobs so that unemployed workers can get back to work as soon as possible. The reason it's probably a challenge in China – it's a challenge everywhere, of course – is that the government hasn't been in this situation for a long time. China has had a long period of high economic growth. They have a lot of experience and a good record at what to do when they have high economic growth but when it's lower, they're going to have to learn and probably strengthen their systems.

David Dole (Image: Asian Development Bank)How effective will the 4 trillion yuan stimulus package be? Where will it be spent? Some sources say that the money has been earmarked for these projects anyway and that spending will be spread out over years ... that it's not a stimulus package in that it is to be spent now to restart the economy.

I think you're right that there's probably a lot in the package that was announced last month that was already there and so it wasn't really a stimulus. The forecast for GDP growth, etc, had already taken into account that the government was going to spend all that money on projects that were already there.

The problem we have in saying what the effect of the stimulus package is that we really don't know very many details about it yet. I can tell you, for example that the government is working very hard on this. I know this because they haven't been available for just regular meetings with us for that reason. That's a very good reason and we respect that.

I think the government will be coming up with details of the package later this month. We'll be able to say with more confidence then what the effect of the stimulus package will be. It may be that there are many things in the package that were already there but those things can still be an important stimulus if they are accelerated.

If there was a project that was already in the pipeline and it was going to be started next year and take three years to complete; if the project starts now and it goes much faster, then of course, that's a stimulus now. That would be exactly a very good policy. By accelerating projects that are already there, we have more confidence that they're good projects. Then we don't have to rush and come up with new ways to spend money without the time and resources to fully develop those projects. or maybe find the best ideas. This kind of acceleration could be a very good approach to create more economic activity now and at the same time avoid the possibility of economic overheating later.