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 If it gets this bad,
lock up your spoons and womenfolk
Even with the outlook
for the world economy rapidly worsening, many economists are still
relatively optimistic about the prospects for the Chinese economy
next year. While the International Monetary Fund recently
lowered its forecast for 2009 real GDP growth to 5 percent, the World
Bank is expecting 7.5 percent. This was also the consensus estimate
of professional forecasters surveyed earlier this month by
Frankfurt-based Dekabank. Wang Tong-san, a spokesperson for the
Chinese Academy of Social Sciences, was even more upbeat at a
recent press conference, telling reporters he expected 9 percent, or
even a bit more, and putting the likelihood of this prediction at "better than 70 percent."
Speaking at the opening
of the fifth US-China Strategic Economic Dialogue on December 4,
China’s central bank governor Zhou Xiao-chuan sounded a more
pessimistic note, however, warning that China must prepare for the
“worst case scenario.” While he didn’t
elaborate, it’s easy to see what he’s worried about.
If the sharp slowdown in exports and investment that is now showing
up in the monthly statistics continues next year, the 8 percent
growth believed to be necessary to keep unemployment under control
will be difficult to achieve.
To answer the question
of how bad things could get in 2009 we might start by considering a
repeat of the net exports crash and fiscal stimulus that followed the
1997 Asia crisis as a base case. In this scenario, real gross
domestic product growth could slow to as little as 4.5 percent.
While in 1999, the worst Asia crisis year for China, growth only fell
to 7.8 percent, the drop in net exports experienced 10 years ago
would have much more severe consequences today because of the Chinese
economy’s increased reliance on foreign trade.
The question then
becomes how much the recently announced Rmb4 trillion fiscal stimulus
package could boost GDP above this base-case level, which already
includes the 1-2 percentage points such policies are believed to have
contributed in 1999. National Development and Reform Commission
Minister Zhang Ping has put the contribution from this stimulus at
only 1 percentage point per year, implying no increase over our base
case at all. And even the 2 percentage-point impact that many
private-sector economists are looking for would at most raise this
base-case forecast by only 1 percentage point. Thus 5.5 percent
growth would seem to be about all that could be hoped for.
The problem, of course,
is that now, unlike in 1999, the whole world is in crisis. Even
5.5 percent growth looks like more of a best case than a worst case
scenario. In the worst case scenario, growth will be close to
zero or even negative, which would have serious implications for
employment and social stability.
Zero percent
In 1998, consumption
accounted for 60 percent of nominal GDP (as calculated by the
expenditure method); investment, 36 percent; and net exports, 4
percent. In 1999, these three components grew at 8 percent, 5
percent, and -35 percent, respectively, resulting in nominal GDP
growth of 5.2 percent. (Real GDP growth was higher that year
due to deflation.)
A rerun of those 1999
growth rates, but starting from the current GDP component shares—with
consumption now accounting for 49 percent of GDP; investment, 42
percent; and net exports, 9 percent—would result in nominal GDP
growth of only 2.9 percent. (The effects of a fiscal stimulus
equivalent to the one in 1999 are captured in the ’99
consumption and investment growth rates as both include government
spending.) Even if we also assume a repeat of the 1-2 percent
deflation of the late 1990s, so that next year’s base case real
GDP grew at, say, 4.5 percent, allowing for an additional one
percentage point fiscal stimulus only gets you to 5.5 percent.
To expect something
more than this, you’d have to believe that either the fiscal
stimulus would contribute a lot more to growth than the NDRC says it
will or that there will be a big turnaround in the world economy next
year. As there is no reason to doubt the NDRC’s analysis
of the stimulus package and all the evidence we have so far suggests
that the global slowdown is worsening rather than abating, neither of
these possibilities seems particularly likely.
On the other hand,
plenty of downside is possible. Private sector investment, for
example, could easily fall next year in response to the ongoing
contraction in real estate and manufacturing and the excess capacity
that has been evident for some time in sectors such as steel, cement,
and auto manufacturing. (In 2007, Hebei Province alone produced
107 million tons of steel, more than any country except Japan.)
Government investment will presumably grow rapidly as a result of the
stimulus plan, but there is no guarantee that this can entirely
compensate for a slowdown in the private sector.
Zero percent investment
growth is certainly not out of the question and this would imply only
0.8 percent nominal GDP growth in our base case scenario. And
if the GDP deflator next year were in the range of October’s 4
percent CPI inflation, real GDP would shrink for the first time since
the beginning of the ‘reform and opening’ period in
1978. (The GDP deflator is a measure of inflation used to
adjust nominal GDP growth for the effects of price changes.)
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The grim truth of war remains: hearts and minds are lost in the campaign to get the enemy by the balls
Despite its rise, China has lopsided financial interdependence with the US
