China needs pat on the back not a helping hand
China is well used to the world carping about its economic policies. There is constant criticism of its exchange-rate regime and unfair export advantages, and warnings about the threats from overheating and policy tightening. Such mantras are often misleading.
Why are we so reluctant to acknowledge China's successful pursuit of stability? Throughout the current global crisis, as in previous periods of turbulence, China has avoided recession and maintained financial stability. Its adherence to the dollar peg and handling of the economy during the Asian crisis of the late Nineties elicited scepticism about whether economic growth was real or sham. As the economy clearly started to boom by 2000, the sceptics turned from arguing China was lying about growth to saying it was growing unfairly or overheating. In late 2008, there were new claims of statistics-rigging but by the second half of 2009, complaints switched to the threat of overheating and asset bubbles. It is hard to deny China has beaten off recession once more.
In 2009, the economy grew by almost 9% and is now worth almost $5,000bn (£3,200bn). Having prudently kept its powder dry in previous years, China didn’t stint in delivering a stimulus to maintain confidence.
There have been benefits for trade partners as imports revived, bringing China's trade surplus down from roughly $300bn (£190bn) to $200bn (£127bn) — 4% of GDP. Provided world markets stabilise, China's exchange-rate policy will go back to a crawling revaluation against the dollar after the freeze put in place during the mayhem of late 2008.
So why are the champagne corks not popping for China? While the world worries about the prolonged chill factor, it seems China is now too hot for comfort. The world has just come through an unprecedented collapse in trade as well |as widespread financial turbulence. In view of this, China quickly adopted a large fiscal package and engineered a surge in bank credit, which more than compensated for the loss |in trade. With hindsight, the economy could have been rescued with a more modest package. However, estimating policy responses precisely in the midst of chaotic conditions was impossible. No one could accuse China of failing to respond as it put on a formidable display of economic fireworks.
China is now a leading exporter in IT and office equipment, selling increasingly to Asia and other emerging markets as well as to the recovering US economy. Demand for these goods and development of new markets have been the key drivers of exports — not a manipulated exchange rate. So is China now too hot? A significant outbreak of consumer price inflation is unlikely. Although prices are now up nearly 2% year-on-year and heading higher in the short- term, such rates are hardly worrying and reflect the rebound from last year's deflation. Other major economies (US, Europe and UK) are also seeing a rebound to more normal inflation rates (2%-3%), but global inflation is not taking off as wage demands remain weak.
The overheating risk, if any, comes from the impact of easy money on asset markets. China faces a dilemma over how far to tighten policy to control asset prices. Indicators point to a very buoyant start for the year and GDP growth could even hit 11%-12% in the first quarter, before cooling off later in the year. Thus the real economy should do well even if credit is curbed.
So what lessons can be drawn from 2009? China proved, yet again, it is recession-proof. The view that China is now dangerously close to blowing itself up amid bursting asset bubbles is almost certainly exaggerated.
China should be given the benefit of the doubt: most probably it will achieve another safe landing even if it has sailed closer to the rocks than usual. Based on its own targets and achievements, its competence can hardly be criticised in the context of the last two years. However, China's critics will never be silent. Scare-mongering about asset bubbles and currency manipulation look set to continue for a while yet.
Vanessa Rossi is an economist at Chatham House