Three interest rate cuts in six weeks, the rolling back of various measures imposed last year on the property and manufacturing sectors, and state spending on urban fixed-asset investment up 42% in
the first half of 2008 (and that’s only for starters)… China is taking monetary and fiscal measures to offset slowing growth.
Beijing spent its way out of trouble (more or less) during the Asian financial crisis, but there is some doubt as to whether it can repeat the trick today. Wang Tao, head of China economic research at UBS, weighed in today on why the doubters are wrong. It’s worth reading:
– While the external shock may be greater, as measured by the magnitude of the global slowdown, we think China’s domestic economic fundamentals are also vastly better than 10 years ago. The government actually has more fiscal resources now than 10 years ago, as reflected in the almost doubling of the relative size of government expenditure (as a share of GDP) from 1997. More importantly, the corporate, banking, and household sector are all in much better shape now than 10 years ago. This is because the Asian financial crisis came in the middle of an already painful domestic economic adjustment, following the bust of the credit boom in the mid 1990s.
– In 1997-1998, about half of all state-owned industrial enterprises (SOEs) were making losses, and the SOE sector had an overall net loss of 0.5%-1% of GDP, not counting various subsidies. In 2007, there were still about a quarter of SOEs that were loss making, but the sector as a whole registered a net profit of 4.3% of GDP.
– Ten years ago, following a period of rapid credit expansion, banks were saddled with non-performing loans (estimated to be 40-50%) and were insolvent. China spent the first part of this decade dealing with the challenge of restructuring the state-owned banks, writing off or taken away legacy NPLs from banks’ balance sheets, and injecting fresh capital. In 2007, the four large state-owned banks made a total profit of RMB206 billion, and the NPL ratio for the whole banking sector is now below 6% (much lower if exclude the yet-to-be restructured Bank of Agriculture).
– The household sector has also seen real income growing more rapidly in the last few years compared to the mid-1990s. Per capita income grew by an average of 10% in real terms for urban households and 8% for rural households in the last five years, but only 6% and 7% between 1994 and 1998.
– The bottom line: the domestic economic fundamentals are much better now than 10 years ago, which provide a good basis and ample policy room to sustain domestic demand growth in the face of likely larger external shock, preventing a collapse of growth in China.