NEWS THAT China’s economy has recovered its buoyant growth momentum after the world recession of 2008-9 rightly attracts a lot of international attention. Could this herald a more general recovery, or is it likely to be confined to China’s own economy? And given the strong inflationary tendencies there, how vulnerable is that economy anyway to its own sharp correction unless its currency is allowed to rise in value and bank lending is much more tightly controlled?
China is set to become the world’s second largest economy after the United States this year, overtaking Japan. It has an 8 per cent share of the world economy, compared to the US’s 25 per cent and the euro zone’s 22 per cent. That means there is a rather strict quantitative limit on its capacity to lift others out of recession.
The same applies to the balance between its consumption and production figures. At a comparatively low 37 per cent of gross domestic product, consumption badly needs to be expanded if internal over-capacity is to be absorbed rather than exported. The government’s 2008-9 stimulus programme has gone some way to correct that; but it is still only about two-thirds spent. There are also inflationary consequences of the booming expenditure on roads, bridges, ports or steel mills, not to mention the dramatic increase in property values over the last year.
Chinese consumers need to be encouraged to spend more and save less if its economic growth is to become self-sustaining. That will probably best be done by a much greater public commitment to social benefits like unemployment insurance and pensions. Otherwise the full potential of China’s domestic market will not be mobilised – notwithstanding the drumbeat of extraordinary statistics like this week’s news that China has overtaken the US in annual car sales of 13 million.
These are longer-term issues, however. There is as yet little evidence of their being agreed or implemented. China is still in the middle of its development. The country’s urban population is only 47 per cent of its population, and 150 million of its people live on less than one US dollar a day.
China’s rulers face the onerous task of managing this development process which has lifted 400 million people out of poverty while avoiding the classic and destabilising business cycles typical of capitalist economies. That makes a higher yuan likely this year. Otherwise more US protectionism is on the cards.