While most countries have been hit hard by the global economic slowdown, China’s economy has continued to grow. In 2009, China’s GDP grew 8.7% from a year earlier. This was more than what many people – including the Chinese government – expected.

Things didn’t look as good as they do now a year ago, says Louis Kuijs who works as a senior economist for the World Bank in Beijing. Demand for Chinese products in other countries had begun to fall sharply. To offset the impact of falling exports China began boosting domestic demand. But because the prospects for the rest of the world were bad, there was a lot of debate on how rapidly China could grow.

“As things turned out, the stimulus policies of the government really were large. The government combined fiscal stimulus with very large monetary stimulus by basically having the banking system increase lending sharply. And that did good things for the economy directly by pumping a lot of money into the economy and having lots of activity on infrastructure projects and other stimulus measures like boosting car sales”.

The stimulus measures adopted by the Chinese government included a 4-trillion yuan stimulus package, tax cuts and consumer subsidies. While investing in major industries and infrastructure, the government also encouraged the Chinese consumers to spend. And with the help of tax cuts, China overtook the United States in car sales for the first time in 2009.

“All this has combined to boosting confidence: consumers in China were not nearly as depressed as they were in other parts of the world. So it is really the very large policy response to the global crisis that made this robust growth possible.”

Kuijs, who is the lead author of World Bank's China Quarterly Update, estimates that up to 7 percentage points of China last year’s growth came from the stimulus measures. Most of the stimulus money, however, didn’t come from the government but from the banks. Chinese banks gave a record 9.6 trillion Yuan of new loans in 2009.

“It was really that monetary stimulus - bank lending - that has surprised us. That was far larger that what we expected. That new bank lending was also twice as large as what the government’s initial target was”.

Based on how well China did last year, it could be argued that China’s economy is not very dependent on world for its growth.

“I would think that's not a correct conclusion. We now have the first estimates from the statistical people that say that net external trade subtracted almost 4 percentage points of GDP growth and that it was really the domestic demand that kept growth up”.

When to withdraw stimulus?

Louis Kuijs is the lead author of the World Bank quarterly report on China. (Image: Louis Kuijs)As the world is gradually recovering from the slowdown, governments around the world have to think when to withdraw stimulus measures. If you do it too early, the economy may slow down before it has actually recovered. If you continue with the stimulus too late, you face the risks of rising inflation and overheating in the economy.

China’s government has said it will keep stimulus measures in place until the end of 2010. Most of the stimulus was, however, used already last year.

“We have been kind of warning people in advance that don't expect all that much more contribution to growth from the stimulus package. But at the same time, it's not the case that there is suddenly no stimulus spending any more in this year. There will be stimulus spending, but the rate of growth will be much lower than last year”.

According to Kuijs, the World Bank expects China’s economy to grow around 9 percent in 2010. But unlike last year, growth is expected to come out of exports and domestic demand rather than government spending.

“China's economy is well integrated in the world economy, much more than, say, the economies of other large emerging markets like India and Brazil. So China continues to be quite a bit dependent on what's going on in the world economy. And things there don't look as bad as they did a year ago”.

One big question is how China’s domestic demand will evolve when the stimulus measures are gradually withdrawn.

“Throughout 2009 we continued to see pretty good wage growth and we expect that wage growth to continue this year. If anything, it may speed up a little bit. We see some signs in the coastal areas that wage growth is going to be quite strong again this year. And that will help boost demand, boost China's own consumer demand. And there is still quite a bit appetite by the business sector to expand and to increase activity. There's a lot of dynamism in the real estate sector.”

A Change in Policy?

China’s government will present its economic plans for this year in front of the National People’s Congress in March. So far the government has pledged to maintain what they call “pro-active fiscal and moderately loose monetary policies”.

China overtook the US in car sales last year. (Image: Radio86)“The indications that we have received from the government is that up until now, they do not change that language on fiscal and monetary even though on the ground they have started to tone down lending. Because they have announced their target this year and they do want to see significantly less new bank lending this year than there was last year.

Kuijs says that the Chinese authorities are already warning the banks to keep new lending within the government target this year. As the economy is growing fast again, the government wants to keep inflation down and prevent the economy from overheating. Some people, however, see this as a sign of a tightening of policy that will be bad for business.

But according to Kuijs, there will still be enough money to boost activity in the Chinese economy.

“In 2009 credit expansion was so large that not all of that has been processed by real economy in the sense that firms got very easy access to credit and put it on their bank accounts. And they still need to carry out some of the projects that they plan to do with that. So in that sense in 2010 the real economic impact of the credit will be higher in the sense that some of the economic impact in 2010 came from credit that was extended last year”.

Behind the numbers

In China, discussion about economy often revolves around quantitative targets. This was very much the case in 2009, when the government did everything it could to meet the 8% annual growth target. There was a concern that if the economy didn’t grow fast enough, rising unemployment would lead to social unrest.

Many migrant workers indeed lost their jobs last year when the global slowdown hit the Chinese export sector. Still, the social consequences of the global crisis in China have turned out to be more modest than in many other parts of the world.

“What has happened is that many migrants have lost their jobs in these export factories but then found other jobs, often not going home to the countryside, but staying in those coastal or other urban centers for two reasons. One was that they don't really want to go back, they have become too much used to life in those more urban areas, even though for them it's far from perfect, they don't go back. The second reason is that there was this alternative demand for labor coming from that domestic economy”.

China's exports are expected to grow in 2010. (Image: Radio86)China’s government has yet to announce its target for economic growth this year. Interestingly, the government shouldn’t talk so much about growth targets. But on the lower levels of the government, officials still seem to take quantitative targets seriously.

“It will be interesting to see actually how they will talk about this. The government has been putting quite a bit of attention to emphasizing the quality of growth rather than the rate of growth. And it will be interesting to see because there has been discussion, you know, government people saying that if we take this seriously then we should not target so much growth”.

Emphasizing the quality of growth would mean that the government pays more attention to the environment and social issues such as inequality. Another big challenge for China is to find a way to rebalance the way that the economy is growing. This would mean less dependence on exports and getting more growth out of domestic economy.

Even though this is what happened last year, the global slowdown hasn’t brought any long-term changes to China’s economy.

“This is very much a short term development because we do expect that exports will bounce back next year when the world economy is at least consolidating or recovering a little bit. And from this perspective it is, you know, what happened in 2009 is very much a temporary phenomenon”.

China’s economy grew more than was expected last year and will likely continue to do so this year too. Is it now safe to say that China has fully recovered?

“That’s a good but tricky question. If the world economy is not going to do well, then that makes things in China more challenging. I think the government itself is still worried of these global risks, and I think that's one of the reasons why the government itself is quite reluctant to call victory over the downturn. It may still be a little bit early to say with confidence that everything is over even though things here look significantly better than in many other parts of the world”.