China Outpaces Industrial Countries in the Race to Recovery
- Expanding its presence in the global economy

Chi Hung KWAN
Consulting Fellow

When the financial crisis emerged from the U.S., it triggered a rapid contraction in the Chinese economy. In response, the Chinese government promptly instituted countercyclical measures, focused on monetary easing and a 4 trillion yuan package aimed at stimulating domestic demand. These measures are beginning to produce results. There is a strong possibility that China will stage an economic recovery ahead of other major world powers. The target GDP growth rate of 8% the Chinese government has set for 2009 is achievable. With industrial countries experiencing negative growth across the board, China is expanding its presence in the global economy.

Strong domestic demand supporting the economy

China's macroeconomic indicators suggest that the country's economy hit bottom at the beginning of 2009, and is already on its way to recovery. China's GDP grew 6.1% year-on-year in the first quarter of 2009. Growth was below the year-on-year growth of 6.8% achieved in the fourth quarter of 2008. However, the first quarter of 2009 had one less day than the same quarter in 2008, which was a leap year. (There were 90 days in the first quarter of 2009, compared with 91 days in the first quarter of 2008). Taking this factor into consideration, China's year-on-year GDP growth held up well. In fact, the country's GDP "per day" rose 7.3% year-on-year, an indicator that better reflects the actual situation in the first quarter of 2009 (note 1). Moreover, year-on-year growth in China's industrial output turned around after bottoming out at 3.8% in January and February, reaching 8.3% in March and 7.3% in April.

Looking at GDP by demand component, external demand remained weak in the first quarter of 2009. However, domestic demand was relatively strong, underpinning overall economic growth.

In external demand, both exports and imports (on a U.S. dollar basis) fell substantially below the levels recorded in the previous year in the period from November 2008, with the former sliding 20.5% year-on-year and the latter plunging 28.7% from January 2009 to April 2009. Imports decreased more than exports because they reflected sharp falls in import prices of oil and other primary commodities. Exports are likely to remain stagnant for some time to come, with no prospect of a recovery in the United States and other advanced markets. In contrast to the slump in external demand, domestic demand, which consists of consumption and investment, appears to be staging a modest acceleration. Looking at consumption, nominal retail sales rose 15.0% year-on-year in the period from January 2009 to April 2009. Retail sales on a real basis grew at a higher rate of 15.9% year-on-year when the negative inflation rate is taken into consideration. (The consumer price index fell 0.8% year-on-year in the period from January 2009 to April 2009.) The growth was higher for rural areas than for urban areas, in a pattern reversed from the usual one.

In the second half of 2008, automobile sales fell sharply below levels recorded in the same period a year ago. However, their number has quickly recovered since the beginning of 2009, climbing at the steep year-on-year rate of 25.0% in April 2009. Sales were particularly strong for car models with engine displacements of 1,600 cc or less, mainly those sold under Chinese brands, as a result of measures to lower or remove the automobile acquisition tax. With the sharp fall in auto sales in the United States, China has emerged as the world's largest auto market.

Per-capita disposable income of China's urban residents and per-capita cash income of the country's rural residents (on a real basis) rose 11.2% year-on-year and 8.6% year-on-year, respectively, in the first quarter of 2009. This income growth easily surpassed China's real GDP growth. Growing personal income is supporting consumption in China.

Investment, another pillar of domestic demand, remains strong, with expanding public works spending as a key underlying factor. Fix-asset Investment in urban areas grew 30.5% year-on-year in the period from January 2009 to April 2009. Investment is increasing more rapidly in Central and Western China than it is in Eastern China. As a result, the GDP growth rate in the Western part has surpassed that in the Eastern part of the country, in a reversal of the traditional pattern. Fiscal expenditures, consisting of spending by central and local governments, climbed 31.7% year-on-year in the first four months of 2009, on the back of increased outlays under economic stimulus measures worth 4 trillion yuan.

Leading indicators suggest economic recovery

Meanwhile, leading indicators, such as the Purchasing Managers' Index (PMI), share prices and money supply, suggest China's economy is recovering.

To begin with, the PMI, which reflects conditions in the manufacturing sector, is recovering from its bottom of 38.8% in November 2008. The PMI topped 50%, the economic assessment benchmark, for three consecutive months starting March 2009.

Share prices have turned upward, too. In contrast to the lows seen in major overseas markets, by February 2009 the SSE Composite Index had recovered ahead of all other major markets to the level it had reached before the Lehman Shock, which hit financial markets in September 2008. Subsequently, the SSE Composite Index has continued to climb.

Moreover, money supply (M2) and bank loans are increasing at an accelerating clip. The M2 and bank loans denominated in Chinese yuan grew at impressive year-on-year rates of 26.0% and 29.7%, respectively, in April 2009. Cumulative increase in bank loans from January 2009 to April 2009 reached 5.17 trillion yuan, exceeding the annual target of 5 trillion yuan set by the Chinese government.

These indicators suggest that China's economy has hit bottom and is on the road to recovery. The country's GDP will begin to rise in the second quarter of 2009 and GDP growth will accelerate further in the second half of the same year. The annual GDP growth of 8%, targeted by the Chinese government, appears achievable in this context.

A milestone on the road to becoming a global power

As described above, the Chinese economy is continuing to perform relatively well, compared with the economies of other countries, in spite of the fallout from the broadening and deepening financial crisis that began in the United States. Fueled by its economic performance, China presence in the global economy is on the rise.

A further deceleration of the global economy resulting from the financial crisis appears inevitable in 2009, following the economic slowdown in 2008. According to the World Economic Outlook, announced by the International Monetary Fund (IMF) on April 16, 2009, Japan, the United States, and the Euro Area are all set to experience economic contractions in 2009, with the result that the rate of global economic growth will fall from 3.2% in 2008 to - 1.3%. Meanwhile, China is expected to sustain relatively high economic growth at a rate of 6.5% in 2009, in spite of the continuing slowdown. China's GDP accounts for 12.1% of the world's GDP on a purchasing power parity (PPP) basis. In light of the data, China's contribution to global economic growth is projected at 0.8% (6.5% multiplied by 12.1%), far surpassing the global economic growth rate of - 1.3% (figure 1).The rate of global economic growth would decline an additional 0.8% to - 2.1% if China were to experience zero growth as well.

Figure 1: Contributions to the global economic growth rate made by major countries and regions
Figure 1: Contributions to the global economic growth rate made by major countries and regions
(Source) Prepared on the basis of IMF, the World Economic Outlook Update, April 2009

Thus the balance of power in the global economy has undergone major changes in the aftermath of this latest financial crisis. Looking back, the Asian financial crisis from 1997 to 1998 proved to be an event that symbolized China's rise as a regional economic power; while the currencies and economic growth of Asian nations, including Japan, took a nosedive following the devaluation of Thai baht in July 1997, China sustained its economic growth at a year-on-year rate of 7% through fiscal expansion. Ten years later, China's position as a global economic leader will be indisputable if and when it succeeds in sustaining its impressive rate of growth in this current global financial crisis, which has dealt a major blow to not only "ground zero" itself, the United States, but also to other advanced economies, including the European Union and Japan.

June 9, 2009
  • (Note 1) Method for calculating growth in "GDP per day":
  • Assume that GDP for the first quarter of 2008 is 100, GDP per day in that quarter is 1.0989 (100/91 days).
  • In the second quarter of 2009, GDP is 106.1 (with GDP growing at 6.1% year-on-year), and GDP per day is 1.1789 (106.1/90 days).
  • Growth in GDP per day for the first quarter of 2009 becomes 7.3% (1.1789/1.0989 − 1) x 100).

June 9, 2009