The first few months of 2009 will be rough in many parts of the world, and China is no exception. To smooth out the bumps, Beijing’s US$586 billion stimulus package will try to boost investment in infrastructure and other areas.
The government hopes that its moves will inspire and encourage the private sector, which, as we argue in this month’s cover story, is the key to the success of the stimulus.
The question is now less about whether the stimulus package will work. It looks set to keep growth near enough the magical 8% figure, if still sharply down from the 11.9% seen in 2007. China has a proven track record in spending big when external demand slows down.
Rather, the question is whether the economic downturn, the stimulus package and other assorted distractions will keep China’s government from focusing on a policy of sustainable growth.
Beijing understandably does not want to waste any time in addressing economic woes, given the looming shadows of mass unemployment and social unrest. However, by resorting to the same spend-and-export model that got it through past crunches, the government could harm China’s long-term prospects.
Actions like raising rebates for export industries and a surprisingly steep devaluation of the renminbi might lead some to expect a return to the old ways. (It is worth noting that both Beijing and many economists say that the revaluation was not politically motivated – that may be, but the perception that China might use its currency to protect exporters is alive and well.)
If Beijing wants to dispel the notion that it is hardwired to a growth model based on industrial investment and low-end exports, it will need to find a new approach.
There is no doubt that better infrastructure, particularly in China’s poorer interior, contributes to better commercial networks, higher wages and consequently higher standards of living. Those must be underpinned by investment in areas like health care, education and social security, which, encouragingly, are included in the stimulus package. It remains to be seen whether this investment will be enough – or properly targeted.
Much has been made recently of China’s ability to save the world. Until the country is able to stand on its own, buoyed by robust domestic demand rather than the developed world’s demand for cheap Chinese-made goods, this will remain a pipe dream. Government spending and direction will keep the worst at bay for the time being, but more fundamental change will be needed for success in the years to come.