Back when the Asian financial crisis ravaged the world, China surprised nearly everyone by bulldozing through the downturn while suffering hardly a scratch. Could it be possible that the Middle Kingdom is about to repeat that amazing feat, in the face of a much, much worse economic crisis?
Goldman Sachs appears to think so. Last week, Goldman upgraded its estimate of Chinese GDP growth in 2009 from 6 percent to 8.3 percent. Even more astoundingly, the investment bank forecast that GDP growth in 2010 would be back to a robust 10.9 percent.
Stephanie Flanders, economics editor at the BBC, writes in her blog about a conversation with Jim O'Neill, Goldman Sachs' chief economist, who notes that China's fiscal stimulus was bigger than the United States (and is being spent much, much faster) and that "the loosening of credit conditions is greater than any that O'Neill has ever seen." Recent visitors to inland China, which has always been less dependent on exports than the coast, also have positive reports.
They say that firms there are already benefiting from all the new infrastructure projects that the government is putting on stream. And consumer spending is holding up as well, growing at annual rates of close to 20 percent.
The national picture is also looking up. The volume of bank loans grew by nearly 30 percent in the first three months of the year. While the British were obsessing over their finances, China also reported a record month for car sales in March.
Consumer spending is also supposed to be growing at a 20 percent annual rate. And while observers of the U.S. economy are moderately encouraged that the manufacturing sector contracted at a slower pace in April than in March (this is what the Wall Street Journal calls improvement), in China, manufacturing activity really did grow in April. And all this is happening while world trade, supposedly China's lifeblood, is forecast to decline by 9 percent in 2009 -- a collapse the likes of which we haven't seen since the Great Depression.
There are dissenting views, to be sure. Economist Willem Buiter, writing in the Financial Times, does not believe that China will maintain "a sustained early recovery" precisely "because of its external trade dependency."
Growth in demand for its exports will not revive anytime soon. The country is not large enough to pull itself up by its own boot straps, unless it achieves a radical restructuring of its production and a shift in the composition of final demand away from exports and towards domestic final demand.
China recognizes this and has thrown the kitchen sink at the problem. Although it is hard to understand the exact size of the fiscal stimulus it has provided, there is no doubt that this stimulus was large. Interest rates have been cut. Credit growth, including bank lending to state enterprises and to construction has exploded. The problem with this approach is that the composition of the demand stimulus and production boost is completely wrong. The government has simply done more of whatever it was doing in the past: increased investment in the production of exportable goods and heavy industry (metals and chemicals), increased production of semi-finished manufactured goods and increased investment in infrastructure. The inevitable result of this investment boom will be increased excess capacity in exportables and unprecedented environmental destruction ...
The green shoots we may be seeing in China will therefore not endure unless the country manages, very rapidly, a radical change in the composition of its production and consumption. That is possible, but not likely.
Buiter's pessimism is well taken. But there's another possibility to watch for. While the rich nations of the world have been forced to scramble to fix their banking systems and stabilize economies in free-fall, China may be poised to capitalize on the downturn and come out stronger than ever before. Writing at YaleGlobal Online, Wenran Jiang, a professor of political science at the University of Alberta, argues that China is taking advantage of its huge financial resources to go on a buying binge just at a time when, all over the world, everyone is desperate to raise cash and make a deal. (Found via the indispensable China Digital Times.)
But the current world economic crisis has also presented opportunities with falling commodity prices and declining stock prices of many energy and resource companies. While still somewhat hesitant, some major Chinese companies seem to be on the move to increase their worldwide foreign direct investment portfolios. Leading the way are large Chinese mining companies, and the targets are primarily Australia's mining sector. In February, Aluminum Corp. of China invested $19.5 billion in Rio Tinto Group, now pending for Australian government approval. Canberra approved an A$1.3 billion investment by China's Hunan Valin Iron & Steel Group in Fortescue Metals Group Ltd.
In the energy sector, China has entered a new wave of large deal-making with major global players: It just signed a $25 billion agreement with Russia, getting 15 million tons of crude annually for 20 years beginning in 2011 while providing the loans to Russian oil major Rosneft and the oil pipeline operator Transneft. Beijing has just concluded a $10 billion oil-for-loan deal with Kazakhstan. Another $10 billion agreement with Brazil's Petrobras is under way. As the Deputy Minister of China's National Energy Administration Sun Qin stated, China must utilize its $2 trillion reserve to seize the opportunities brought by the current financial crisis for more loans-in-exchange-for-energy-and-resources deals.
If China really does manage to pull off 11 percent economic growth in 2010, it will be yet another incredible chapter in one of the most amazing economic stories of our time. In other East Asian countries, that kind of sustained economic growth was accompanied by growing pressure for political reform, democratic representation and basic human rights. But on that count, we're still waiting for some true glimmers of hope.