Post-Crisis, China Faces Challenges of Success
Hyun-Sung Khang
July 29, 2010
* Double-digit growth predicted for China
* Revaluation of China currency important for rebalancing, says IMF
* Warnings against rising housing and asset prices
China’s skillful response to the global financial crisis has blunted the worst of the downturn, but IMF economists say trade and current account surpluses must be prevented from reasserting themselves as the global economy recovers and China’s stimulus is withdrawn.
In its regular assessment of one of the world’s leading economies, the IMF said China’s “quick, determined, and effective policy response” meant it was now spearheading the global recovery.
In an interview with IMF Survey online, the Fund’s lead economist on China, Nigel Chalk, said that despite the global slump, the country’s economy had posted an impressive performance.
IMF Survey online: China’s future economic outlook is fairly rosy, according to the IMF, and the Fund is now calling for a gradual withdrawal of stimulus measures. Can you explain how you have come to that conclusion?
Chalk: What we saw going into the crisis was a quite decisive policy response by the government. They clearly understood that the downturn of the global economy would greatly affect China, and you saw a response that involved a large fiscal package to stimulate the economy. It also involved a quite significant amount of monetary stimulus. All of these things kind of work together, they’re all very helpful in supporting the economy in the face of this very large external shock. And you see that in the outturn for 2009. During that year you had more than 4 percent of GDP drag on the economy from the decline of exports. Nevertheless the economy grew overall by more than 9 percent, which is quite an impressive achievement. Our assessment is a large part of that was driven by the public sector stimulus.
IMF Survey online: And indeed, IMF economists are predicting that China’s going to return to double digit growth.
Chalk: Yes. So we have a forecast for this year around 10½ percent growth in GDP. And then they’ll slow a little bit into next year, partly as the public stimulus is withdrawn. But we see that as a very healthy process. It will still be quite close to 10 percent of GDP.
IMF Survey online: How important has China’s stimulus been to global growth?
Chalk: Demand in China has been very helpful to both the region and the global economy. I think what you saw initially in China as the stimulus got into place was a significant increase in commodity imports which helped all of the commodity exporters around the world, particularly countries like Australia and Indonesia who provide a significant amount of commodities to China. But as the process of recovery carried on, you saw a much more broad-based increase in demand from China. We have done some work in our Regional Economic Outlook that shows quite clearly that those countries where the share of their value-added linked to China is greater, were also the ones that recovered faster from this crisis. So there’s fairly compelling evidence that the more linkages you had with China during this crisis, the better you ended up coming out of this crisis.
IMF Survey online: What about the flipside of that? How much danger has this raised of overheating in the economy because this stimulus package has been huge, hasn’t it?
Chalk: On overheating I think it depends on what your definition of overheating is. Often people view overheating of an economy as when strong demand is not being met by an increase in supply and as a result inflation takes hold. I don’t think we see that process happening in China, in part because you’re seeing this big expansion in credit which was accompanied by a big expansion in investment. So there’s a tremendous amount of new capacity being built in China right now. If you take a broader view on overheating, what we do see in China is part of the consequences of this stimulus. There has been quite a rapid run-up in housing prices, in asset prices in general, but particularly housing prices in a number of cities. And I think the authorities themselves recognize this as an issue and have acted—particularly in April of this year—have acted quite proactively to tackle that.
IMF Survey online: Let me go back to the issue of trade because obviously China is a huge trading nation and connected with that issue is the subject of the value of the Chinese currency—the renminbi. There’s been considerable debate about the level of the yuan. What’s the assessment of the IMF economists on this?
Chalk: Our own view is that the renminbi remains substantially below the level consistent with medium-term fundamentals. We see a stronger renminbi as being in the interests of the Chinese people because it will help raise household income; will help increase the labor share of income in China, and help boost consumption. And also on the investment side it will help to provide incentives for companies in China to redirect their investment away from investment into exports and much more into investment that targeting the Chinese consumer. So I think in general we see a stronger currency as a positive for China. It will help with rebalancing; it will help to move towards an economy that’s much more driven by private consumption and less by exports and investment.
IMF Survey online: Explain why the value of the renminbi is important.
Chalk: We see the renminbi as an important issue in the broader agenda for rebalancing the economy. I think our sense is that the Chinese economy would be better driven by more consumption and less exports and investment. It’s a very complicated exercise to achieve that outcome, and there are a number of policies that need to be put in place: structural policies, microeconomic policies—and currency is one of those policies.
IMF Survey online: So basically you’re saying the level of the yuan is important because it could help with the rebalancing effort by China and obviously this is something that Beijing itself recognizes because it’s recently dropped its 23-month peg to the dollar and has now reverted to a managed float. So obviously this is something that is recognized by Beijing itself.
Chalk: Yes, I think there is certainly a lot of support in China for the idea of transforming the economic development model in China toward one that’s much more based on consumption. And so we’ve had a lot of agreement with China on what the policies would be, to underline that. And as I’ve said, this is such a complicated exercise. In a world where this transformation is so complicated you want to use all of the policy tools you have at your disposal.
IMF Survey online: How confident are you that China is well on its way to rebalancing given its return to a managed float with the renminbi; that its trade surplus has shrunk within the last few months? How happy are you with the speed and the process down this path?
Chalk: It’s a mixed picture right now. For example you are seeing very strong consumption in China particularly during the crisis, which was somewhat unexpected; that the consumer really held up really well in China over the past year-and-a-half. But having said that you also have seen, for almost a decade, a decline in consumption as a share of output, and I think it’s going to take quite some time to reverse that trend. There are two forces, I think, that will work against China. The first is that the pickup in global demand will mean that exports and net exports from the economy will start picking up as well. And so that’s going to be a force behind a reassertion of the current account surplus that you’ve seen, and the trade surplus you’ve seen.
Secondly, as the fiscal stimulus is unwound in China we also feel that will create conditions where the current account will have a tendency to rise. So there are quite important headwinds facing China, and I think that will mean they’ll have to be quite proactive in their policy response in order to ensure that the current dynamic you see of rising consumption and a decline in the current account surplus, is sustained through time.
IMF Survey online: Let me end by asking you this question: Why should someone living, say in Latin America, care about the state of the Chinese economy?
Chalk: The Chinese economy is tremendously important to the global economy. You’ve seen over the past year China becoming a much bigger part of global growth. I think you’ve seen the policy response in China as being much more decisive, much more proactive. And that’s going to have spillovers to the whole global economy just given the size of the Chinese economy. For example, a number of Latin American countries are reliant on exports of agricultural products and exports of commodities. China is demanding those commodities, so a stronger China means more demand for those commodities, which in turn has positive spillovers for many of the countries in Latin America.
And at the same time, China is also producing a significant amount of goods for these economies. And so a healthy economy in China, helps the global economy on both sides: in its provision of goods to the global economy, but also China’s own demand of goods from the global economy. It’s tremendously important to the average person in the street in Latin America.
Hyun-Sung Khang
July 29, 2010
* Double-digit growth predicted for China
* Revaluation of China currency important for rebalancing, says IMF
* Warnings against rising housing and asset prices
China’s skillful response to the global financial crisis has blunted the worst of the downturn, but IMF economists say trade and current account surpluses must be prevented from reasserting themselves as the global economy recovers and China’s stimulus is withdrawn.
In its regular assessment of one of the world’s leading economies, the IMF said China’s “quick, determined, and effective policy response” meant it was now spearheading the global recovery.
In an interview with IMF Survey online, the Fund’s lead economist on China, Nigel Chalk, said that despite the global slump, the country’s economy had posted an impressive performance.
IMF Survey online: China’s future economic outlook is fairly rosy, according to the IMF, and the Fund is now calling for a gradual withdrawal of stimulus measures. Can you explain how you have come to that conclusion?
Chalk: What we saw going into the crisis was a quite decisive policy response by the government. They clearly understood that the downturn of the global economy would greatly affect China, and you saw a response that involved a large fiscal package to stimulate the economy. It also involved a quite significant amount of monetary stimulus. All of these things kind of work together, they’re all very helpful in supporting the economy in the face of this very large external shock. And you see that in the outturn for 2009. During that year you had more than 4 percent of GDP drag on the economy from the decline of exports. Nevertheless the economy grew overall by more than 9 percent, which is quite an impressive achievement. Our assessment is a large part of that was driven by the public sector stimulus.
IMF Survey online: And indeed, IMF economists are predicting that China’s going to return to double digit growth.
Chalk: Yes. So we have a forecast for this year around 10½ percent growth in GDP. And then they’ll slow a little bit into next year, partly as the public stimulus is withdrawn. But we see that as a very healthy process. It will still be quite close to 10 percent of GDP.
IMF Survey online: How important has China’s stimulus been to global growth?
Chalk: Demand in China has been very helpful to both the region and the global economy. I think what you saw initially in China as the stimulus got into place was a significant increase in commodity imports which helped all of the commodity exporters around the world, particularly countries like Australia and Indonesia who provide a significant amount of commodities to China. But as the process of recovery carried on, you saw a much more broad-based increase in demand from China. We have done some work in our Regional Economic Outlook that shows quite clearly that those countries where the share of their value-added linked to China is greater, were also the ones that recovered faster from this crisis. So there’s fairly compelling evidence that the more linkages you had with China during this crisis, the better you ended up coming out of this crisis.
IMF Survey online: What about the flipside of that? How much danger has this raised of overheating in the economy because this stimulus package has been huge, hasn’t it?
Chalk: On overheating I think it depends on what your definition of overheating is. Often people view overheating of an economy as when strong demand is not being met by an increase in supply and as a result inflation takes hold. I don’t think we see that process happening in China, in part because you’re seeing this big expansion in credit which was accompanied by a big expansion in investment. So there’s a tremendous amount of new capacity being built in China right now. If you take a broader view on overheating, what we do see in China is part of the consequences of this stimulus. There has been quite a rapid run-up in housing prices, in asset prices in general, but particularly housing prices in a number of cities. And I think the authorities themselves recognize this as an issue and have acted—particularly in April of this year—have acted quite proactively to tackle that.
IMF Survey online: Let me go back to the issue of trade because obviously China is a huge trading nation and connected with that issue is the subject of the value of the Chinese currency—the renminbi. There’s been considerable debate about the level of the yuan. What’s the assessment of the IMF economists on this?
Chalk: Our own view is that the renminbi remains substantially below the level consistent with medium-term fundamentals. We see a stronger renminbi as being in the interests of the Chinese people because it will help raise household income; will help increase the labor share of income in China, and help boost consumption. And also on the investment side it will help to provide incentives for companies in China to redirect their investment away from investment into exports and much more into investment that targeting the Chinese consumer. So I think in general we see a stronger currency as a positive for China. It will help with rebalancing; it will help to move towards an economy that’s much more driven by private consumption and less by exports and investment.
IMF Survey online: Explain why the value of the renminbi is important.
Chalk: We see the renminbi as an important issue in the broader agenda for rebalancing the economy. I think our sense is that the Chinese economy would be better driven by more consumption and less exports and investment. It’s a very complicated exercise to achieve that outcome, and there are a number of policies that need to be put in place: structural policies, microeconomic policies—and currency is one of those policies.
IMF Survey online: So basically you’re saying the level of the yuan is important because it could help with the rebalancing effort by China and obviously this is something that Beijing itself recognizes because it’s recently dropped its 23-month peg to the dollar and has now reverted to a managed float. So obviously this is something that is recognized by Beijing itself.
Chalk: Yes, I think there is certainly a lot of support in China for the idea of transforming the economic development model in China toward one that’s much more based on consumption. And so we’ve had a lot of agreement with China on what the policies would be, to underline that. And as I’ve said, this is such a complicated exercise. In a world where this transformation is so complicated you want to use all of the policy tools you have at your disposal.
IMF Survey online: How confident are you that China is well on its way to rebalancing given its return to a managed float with the renminbi; that its trade surplus has shrunk within the last few months? How happy are you with the speed and the process down this path?
Chalk: It’s a mixed picture right now. For example you are seeing very strong consumption in China particularly during the crisis, which was somewhat unexpected; that the consumer really held up really well in China over the past year-and-a-half. But having said that you also have seen, for almost a decade, a decline in consumption as a share of output, and I think it’s going to take quite some time to reverse that trend. There are two forces, I think, that will work against China. The first is that the pickup in global demand will mean that exports and net exports from the economy will start picking up as well. And so that’s going to be a force behind a reassertion of the current account surplus that you’ve seen, and the trade surplus you’ve seen.
Secondly, as the fiscal stimulus is unwound in China we also feel that will create conditions where the current account will have a tendency to rise. So there are quite important headwinds facing China, and I think that will mean they’ll have to be quite proactive in their policy response in order to ensure that the current dynamic you see of rising consumption and a decline in the current account surplus, is sustained through time.
IMF Survey online: Let me end by asking you this question: Why should someone living, say in Latin America, care about the state of the Chinese economy?
Chalk: The Chinese economy is tremendously important to the global economy. You’ve seen over the past year China becoming a much bigger part of global growth. I think you’ve seen the policy response in China as being much more decisive, much more proactive. And that’s going to have spillovers to the whole global economy just given the size of the Chinese economy. For example, a number of Latin American countries are reliant on exports of agricultural products and exports of commodities. China is demanding those commodities, so a stronger China means more demand for those commodities, which in turn has positive spillovers for many of the countries in Latin America.
And at the same time, China is also producing a significant amount of goods for these economies. And so a healthy economy in China, helps the global economy on both sides: in its provision of goods to the global economy, but also China’s own demand of goods from the global economy. It’s tremendously important to the average person in the street in Latin America.