Can China save the world from economic crisis?

By Jean Sanuk

November 15, 2011 -- Asia Left Observer -- While North America and Europe were hard hit, China has resisted the international crisis of 2008 thanks to a rescue plan which combined huge public spending, a low interest rate and consumption subsidies. China’s growth rate reached 9% in 2009 and 10.4% in 2010, dragging in its wake Asia and Latin America out of the crisis. It has also managed to maintain unemployment to a sustainable level. China even overtook Japan, in 2010, as the second-largest economy in the world in terms of GDP and it is closing the gap with the US. On the whole, China’s rise seems unaffected by the subprime crisis. A closer look shows that real problems lie ahead.

Chinese workers don’t accept overexploitation any longer. A wave of strikes spread during the summer of 2010. Workers were fighting for wage increases, improvement of working conditions and the right to organise and bargain. Inflation, especially of food products, which accelerated since the middle of 2010, is a new problem for workers and a concern for the government, which fears a wave of discontent. On top of that, the government is doing its best to prevent any contagion from the democratic revolutions in Arab countries. Although the overall situation in China is completely different, these democratic revolutions show to Chinese workers that it is indeed possible to topple even the worst and most powerful dictatorships.

China’s resistance to the first stage of the recession

The impact of the crisis on China and Asia, so far, has been limited (Sanuk 2008). Asian banks were not much engaged in subprime loans and toxic products, unlike European banks. With the exception of South Korea, Asian countries did not rely on short-term capital and bank loans to finance their economies. They were not caught in a debt trap like eastern European countries or Greece. Most of them, in particular China, had accumulated a huge amount of currency reserves and were able to cope with capital flights that occurred at the end of 2008.

Asian countries were primarily hit by the fall in their exports because of the slump in demand in North America and Europe. As a general rule, the recessive impact has been stronger in the most open Asian countries whose exports were concentrated in manufacturing and where the USA was an important customer. For instance, exports of manufactured products represent around 70% in Malaysia, more than 40% in Thailand and Cambodia, around 30% in China, South Korea, the Philippines and Vietnam, but less than 10% in India and Pakistan.

These characteristics explain why the three biggest and most populated countries in Asia, China, India and Indonesia, have not experienced a single quarter of recession between 2008 and 2009. The resilience of these three countries, and most of all China, which is among the biggest trade partners of Asian countries, led to a quick rebound in the second quarter of 2009 and a much stronger “V” shape recovery than in the rest of the world.

First, to absorb the shock of the fall in exports, Asian countries launched unprecedented rescue plans, unlike during the “Asian crisis” of 1997-1999 when structural adjustment plans sponsored by the International Monetary Fund (IMF) worsened the crisis. China's rescue plan draws attention by its magnitude: US$585 billion amounting to 13.3% of GDP to be spent on a two-year span. On average, the rescue plans announced by Asian countries amounted to 7.5% of GDP against 2.8% of GDP for the G7 countries. Moreover, Asian rescue plans were more focused on public expenditure than tax cuts. On average, Asian countries dedicated 80% to increases in public spending compared with a 60% average in G20 countries. The only exception is Indonesia where tax cuts dominate.

Those public expenses were accompanied by expansionary monetary policy. The median interest rate of Asian central banks has decreased by 2.25 points, which is five times more than during the previous crisis. As the banking system continued to work, this had a positive impact on growth. In countries like Vietnam and China, the expansionary monetary policy played a dominant role. In China, public spending has increased by a modest 26% in 2008 up from 23% in 2007, but it came back to 21% in 2009 and even 17% in 2010 when the rescue plan officially ended. On the whole, public expenses did not play a crucial role in absorbing the shock. It is in fact the expansion of credit which took the lead in 2009 with a spectacular increase of 31% (see Figure 2. It too fell in 2010 to -4% when the Chinese government decided to cool down the economy to prevent easy money inducing a new speculative bubble (more on this point below).

Second, household consumption remained steady as employment did not collapse during the crisis. In times of crisis, there are usually no strong increases in the unemployment rate in Asian countries, for there are no unemployment benefits except in a few countries. Workers who lose their jobs in industry try to find one in services, work as self-employed workers or return to the family farm whenever it is possible. It is especially the case in China, where hundreds of thousands migrant workers went back to the interior in the winter of 2008 or stayed there after the end of the new year in February 2009. But because the economy recovered in spring 2009, a lot of them returned to the cities to find a job, where they pay more.

Third, defying many sombre prognostics, Chinese exports fell from September 2008 to February 2009 but did not collapse and soon recuperated thanks to recovery in world trade. Given the high import content component of Chinese exports (about 50%) imports fell in the same proportion so that the current account stayed almost always positive although by a smaller magnitude (see Figure 3). This reveals both the resilience of China to external shocks and its weakness at the same time.

The myth of Asia decoupling from the rest of the world

China's rapid trade success is due to its role as an assembly centre of components made elsewhere in Asia, mostly in Japan and South Korea, and to a lesser extent in South-East Asia. The final products assembled in China are in the main destined for the rest of the world, particularly Europe and North America. To be less vulnerable to the crisis stemming from the USA and Europe, East and South-East Asia need to absorb a major and growing part of its production of final products. Although East Asian internal trade has progressed since the crisis, it has not yet reached a stage where it could cushion worldwide trade contraction.

Although China has become the second-largest economy inf the world, bypassing Japan in 2010 and catching up with the USA in terms of the absolute value of its GDP, China and the rest of Asia are still far from supplanting the USA, which has the biggest markets in the world. If we take into account total Chinese population, income per capita would catch-up with the US in 25 to 50 years' time, based on current assumptions. If we now only take into account the richest regions of China, most of them being located on the coast, representing 42% of the Chinese population in 2005, this catch-up could occur in just 10 to 20 years.

The most optimistic hypothesis made by the Asian Development Bank shows that at the present pace, the 22 Asian countries that are classified as "developing Asia" should outstrip the OECD countries’ consumption by 2030.

All these predictions rest on optimistic scenarios and are far from certain given the present international crisis. To be able to decouple from the rest of the world (at least relatively, because there is no such thing as a completely autonomous region in the present global economy) Asia, and most of all China, must rebalance its economy away from export-led growth and in favour of the domestic market. This can only be achieved if three conditions are fulfilled.

First, China must revalue in part its exchange rate to lower the price of imports and hence the cost of goods it produces for the internal market and make exports less profitable than they are. Second, and most important, China must significantly raise the real wages of urban and rural workers so that internal consumption can recover from its present extremely low level (35% of GDP). This is the most sensitive decision because Chinese capitalists and bureaucrats are used to living like fat cats thanks to the huge profits that state-owned and private enterprises are making on the back of overexploited workers. Third, China must increase the interest rate from its present low level in order to discourage the very high investment in capital-intensive industry and reorient the economy in favour of domestic services like education, health, housing, culture and leisure, which are needed by the vast majority of Chinese people. These are labour intensive and could generate the millions of jobs that China requires, and they are less energy consuming and less polluting than industry. China has made some progress in this direction but is far from the objective.

Can China resist a new recession?

In 2011, the international crisis entered a second stage. The crisis in Europe is very serious and the USA is not in a much better situation. A second recession is coming and there will be a new slump in world trade. Chinese and Asian exports will be hit again and the question is whether China and Asia will be able to resist the new trade contraction with a massive rescue plan again? There are reasons to be pessimistic.

China and the Asian countries cannot launch massive public expenditure or massively expand credit every two years. The last rescue plans have already created problems that are not yet resolved: in the Chinese case, a sharp increase of non-performing loans in the banking sector, inflation and speculative bubbles in real estate and in the stock exchange. Like in the USA and Europe, Chinese banks will have to be rescued with public money. And like in the USA and Europe, it is always to the workers that governments present the bill. In China, rescuing the banks and local authorities that are heavily indebted would cost a lot of money and if workers have to pay for it in one way or another, the objective of rebalancing growth in favour of domestic demand would be postponed to the long-term and with it the myth that China could drag the world out the crisis.


Anderson, Jonathan. 2009. “The Myth of Chinese Savings.” Far Eastern Economic Review.

Aziz, Jahangir and Cui Li. 2007. “Explaining China’s Low Consumption: The Neglected Role of Household Income.” IMF Working Paper: 38. IMF: Washington DC.

Baldacci, Emanuele, Callegari Giovanni, Coady David, Ding Ding, Kumar Manmohan, Tommasino Pietro, and Woo Jaejoon. 2010. “Public Expenditures on Social Programs and Household Consumption in China.” IMF Working Paper, Fiscal Affairs Department: 28. IMF: Washington DC.

Blanchard, Olivier and Giavazzi Francesco. 2005. “Rebalancing Growth in China: a Three handed Approach.” MIT Department of Economics 37. MIT: Washington D.C.

Cai, Fang and Wang Meiyan (2010). “Growth and structural changes in employment in transition China”. Journal of Comparative Economics, vol. 38, p 71-81.

Chandra, Sonali, Nabar Malhar, and Porter Nathan. 2010. “Corporate Savings and Rebalancing in Asia,” in Asia and Pacific. Building a Sustained Recovery. IMF ed. Washington D.C.: IMF, pp. 55-70.

Ellis, Luci and Kathryn Smith. 2007. “The global upward trend in the profit share.” BIS Working Papers Monetary and Economic Department: 29. BIS: Basle.

European, Commission. 2007. “The Labour Income Share in the European Union,” in Employment in Europe. European Commission, ed. Bruxels.

Hofman, Bert and Kuijs Louis. 2008. “Rebalancing China’s Growth,” in Debating China’s Exchange Rate Policy. Morris Goldstein and Lardy Nicholas R. eds: Peterson Institute for Economics, pp. 401. IMF. 2007. “The Globalization of Labor,” in World Economic Outlook 2007. Washington D.C.: IMF.

Prasad, Eswar. 2009. “Rebalancing Growth in Asia.” Discussion Paper Series: 36. Institute for the Study of Labor (IZA): Bonn.

Jha, Shikha, Prasad Eswar, and Terada-Hagiwara Akiko.2009. “Saving in Asia: Issues for Rebalancing Growth.” ADB Economics Working Paper Series: 54. Asian Development Bank: Manilla.

Prasad, Eswar. 2009. “Rebalancing Growth in Asia.” Discussion Paper Series: 36. Institute for the Study of Labor (IZA): Bonn

Sanuk Jean (2008). “The Way Out of the Crisis in Asia: Rebalancing Growth Without Income Hikes?” Downloadable at Asia Left Observer:

Wiemer, Calla. 2009. “The big savers:households and government.” China Economic Quaterly, pp. 25-30.


By Antoaneta Becker

SHANGHAI, Nov 19, 2011 (IPS) - Europe has its Greece moment and China has its Wenzhou crisis. When European leaders were calling on China to step in and provide a lifeline to the eurozone by investing in its bailout programme, voices inside China were saying Beijing should save Wenzhou and forget about Europe.

Though small in the big China canvas, the city of Wenzhou could have the same effect on its economy, some alleged, as Greece has had on the eurozone.

But unlike the Greece fallout, the Wenzhou crisis may still turn out to be a blessing in disguise for China, argue others. As the birthplace of private enterprise in communist China, Wenzhou – often reviled and broadly admired for its devil-may-care businessmen - could now become a trigger for genuine banking reform that will transform China.

"Give Wenzhou a chance, let it rely on what it understands best – the way market works, and then we will have a case when not China saves Wenzhou but Wenzhou saves China," Wang Wei, secretary of the China Private Equity Investment Association, wrote in the China Times.

A city in the Yangtze River delta some 350 km from Shanghai, Wenzhou has for years been synonymous with self-made wealth. As a former treaty port from where many Chinese went abroad in search of work, Wenzhou has entrepreneurial roots dating back centuries.

Despite recurrent campaigns against capitalists in the communist era that lasted until the mid-1990s, Wenzhou prospered as family businesses set up factories in the 1980s making shoes, garments, buttons and plastic toys. Excluded from the stock markets and ignored by state banks, those businesses opened up clandestine private banks and lent money to each other or borrowed from relatives abroad.

"It is how I made it from Wenzhou to Shanghai and abroad," Yuan Suquan, a producer of home interior accessories like tassels, highly sought after by furnishing houses in Europe, tells IPS. Yuan, in Shanghai to seek orders from domestic clients, borrowed from a private lender to expand production when orders began to come first from France and then from Sweden.

He first borrowed at 2 percent but says interest rates have gone up in recent years while orders have decreased. "Now it is more like 7 or 8 percent and more even if you know the lenders," he says. "I'm still okay because my stuff is quite specialised but others who made lighters or buttons are now losing to factories in Cambodia and Vietnam, and are squeezed to pay back their debts."

Shanghai is the playground for those Wenzhou businessmen that became really rich. Here they flaunt their wealth driving fancy cars, sipping champagne on the rooftop lounge of Roosevelt House on the historic Bund and indulge in brand shopping in the arcades below.

"The Shanghai property market was inflated by them," says taxi driver Liu as he speeds along the city's elevated roads where the vistas rival the celebrated skyline of Hong Kong. "People like me cannot afford to buy a place here because Wenzhou traders speculated in Shanghai property."

This however was true before stories of runaway Wenzhou bosses, bankrupt companies and even suicides started coming from the city. Since summer Wenzhou has made headlines with some notorious cases of loan-sharking, prompting Premier Wen Jiabao to pay a visit in October and urge banks to lend more credit support to family and small businesses.

As the European economic crisis is beginning to bite and small companies are struggling with higher wages and the appreciation of the Chinese yuan, some companies have indeed run aground. Economists have begun talking about the Wenzhou crisis as the tip of the iceberg of a widespread shadow financing system that could imperil the real economy.

Zhang Qi, researcher with the Shanghai New Finance Research Institute disagrees. He says the Wenzhou crisis is a reflection of the relentless attack of state businesses on private capital, or what is known as ‘Guo jin Min tui’ in Chinese, and the way the business and financial environment for the private sector has deteriorated.

"What these Wenzhou companies need is not for the state to rescue them," Zhang says. "They need for private lending to be legalised so that they can be financially independent and cope with the changes in the global economy."

Last week Beijing signalled that it may be finally relaxing its control on funding for the private sector, and is considering legalising private lending in some of the forms that has taken root in Wenzhou's private banks.

A central bank official told the Xinhua news agency that Beijing is exploring ways to support small and medium private companies by legalising private lending at rates that do not exceed four times those of bank loans.

"This is real progress after many years of Beijing trying to squash underground banks and eliminate private lenders," says Zhu Dake, researcher at Shanghai Tongji University. "It is also perhaps a sign that the demands of the interest groups representing China's private capital are becoming more difficult to ignore by the communist party." (END)


TWN Info Service on Climate Change (Nov11/04)
22 November 2011
Third World Network
Is China still a developing country?
Published in SUNS #7265 dated 22 November 2011
Geneva, 21 Nov (Martin Khor*) - Is China still a developing country, or has it joined the ranks of the advanced developed countries?
This has become a topical question, especially after US President Barack Obama reportedly told the Chinese President Hu Jintao last week that China had to act more responsibly, now that it has "grown up."
This interesting one-to-one conversation took place at the APEC Summit in Hawaii. And when Obama met Chinese premier Wen Jiabao at the East Asia Summit hosted by ASEAN in Bali last week, he must have said something similar, in between scolding him for not allowing the Chinese currency to shoot up.
By telling China that it has become a grown-up adult, Obama meant that China should now be treated just like the US or Europe in terms of international obligations. Like taking on binding commitments to reduce greenhouse gas emissions, cutting its tariffs and to near zero and giving up its subsidies under the World Trade Organisation (WTO), giving aid to poor countries, and letting its currency float.
This is what the US has been pressurizing China to do in the recent negotiations on climate change, in the WTO's Doha talks, at various meetings of the United Nations and at the APEC summit. In fact, most of the important multilateral negotiations are stalled because the US (with Europe and Japan standing behind them) insists that China gives up its developing-country status and takes on the obligations of a developed country.
It's not only China, of course. They also want India and Brazil to do likewise. And often also mentioned are South Africa and the wealthier or bigger ASEAN countries.
The main focus however is China. There has been a growing respect for or rather fear of China, that it is growing so fast and has become so big and powerful it might swallow up the Western world in a decade or two.
So, the question is pertinent: is China a developed country?
The answer depends on what criteria are used. In absolute terms, China is indeed a big economy. Its GNP is second only to the United States. It has become the biggest emitter of Greenhouse Gases, having overtaken the United States.
But this is mainly because China is a big country, in terms of population. With 1.3 billion people, it's the world's most populous country. India is not far behind with 1.2 billion people and is on track to overtake China in two decades.
However, despite the mighty image it has been given by the world media, China looks like a very ordinary developing country, once we look at per capita indicators.
Whether one is a developed or developing country is defined by the UN and by the International Monetary Fund (IMF) and World Bank, and the most important criterion is income per capita.
By that yardstick, China is very much a developing country.
The IMF, in its latest World Economic Outlook, classifies China as a developing country, with a per capita Gross Domestic Product in 2010 of US$4,382, ranked a lowly 91 of 184 countries in the world.
Six African countries (Equatorial Guinea, Gabon, Botswana, Mauritius, South Africa, and Namibia) had GDP per capita levels higher than China.
China's GDP per capita was less than a tenth that of the United States, which had $46,860. Luxembourg had the highest ranking, with $108,952. Malaysia was No. 65 with $8,423 while Singapore was No. 15 at $43,117.
The World Bank classifies countries into four income groups. In its latest report, economies were divided according to 2008 Gross National Income (GNI) per capita according to the following ranges of income:
-- Low income countries with GNI per capita below US$1,006;
-- Lower middle income countries with GNI per capita between US$1,006 and US$3,975;
-- Upper middle income countries with GNI per capita between US$3,976 and US$12,275; and
-- High income countries with GNI above US$12,276.
The World Bank classifies all low- and middle-income countries as developing. According to the Bank's figures, China's GNP per capita was US$2,050 in 2006, US$2,490 in 2007, US$3,050 in 2008, US$3,650 in 2009 and US$4,260 in 2010.
In fact, China has in recent years been in the category of lower-middle income countries until it crossed over to upper middle income in 2010.
Economists also use the measure of GNP per capita "in gross purchasing power" (or GPP). This is to take into account the different cost of living in different countries. People living in countries with a lower cost of living could enjoy a higher living standard than their country's GNP implies.
In 2010, in GDP (at GPP) per capita terms, China was lower still at No. 95 with US$7,544, just below Ecuador and Bosnia and Herzegovina, and just above Albania, El Salvador, Tonga and Guyana.
By contrast, Malaysia was at No. 58 with GPP per capita of US$14,744 while Singapore was No. 3 with US$56, 694.
The UN Development Programme has a human development index (HDI) that measures quality of life in terms of income, schooling, life expectancy and so on.
The Human Development Report 2011 shows China at No. 101 of 187 countries with a HDI of 0.687 and in a category of "medium human development".
It was below many other developing countries in the very high or high human development categories, such as Chile, Argentina, Barbados, Uruguay, Cuba, Bahamas, Panama, Malaysia, Libya, Grenada, Lebanon, Venezuela, Mauritius, Jamaica, Ecuador, Brazil, Iran, Tongo, Tunisia.
What about climate change? China, again mainly because of its huge population, is the top Greenhouse Gas emitting country, with a total of 7,232 Megaton of CO2 equivalent in 2005. The US is second with 6,914 Megaton. India was fifth with 1,859 Megaton.
But in per capita terms, China's emissions level was 5.5 CO2-equivalent per person, ranked 84 in the world.
By contrast, the US's per capita emission was 23.4 CO2 equivalent, Australia 27.3, Canada 22.9, Russia 13.7, Germany 11.9, Japan 10.5, Singapore 11.4, Malaysia 9.2, South Africa 9.0, Brazil 5.4, Indonesia 2.7, India 1.7, Tanzania 1.5 and Rwanda 0.4.
Thus, as the No. 91 country in the world in GDP per capita, No. 101 in human development index and No. 84 in per capita emissions, China is looking like, and is, a middle-level or even lower-middle-level developing country, with not only all the developed countries ahead of it, but also many developing countries.
China also shares the same characteristics of many developing countries. More than 700 million of its 1.3 billion people live in the rural areas, and in 2008 there was a large imbalance, with the urban disposable household income 3.3 times bigger on average than in rural areas.
According to China's own standard, 43 million Chinese are low-income (below US$160 a year). By the higher UN standard, 150 million people are poor, living on less than one US dollar a day.
Each year, 12 million people are newly added to the job market, outnumbering the population of Greece, and it is quite a task to find them jobs.
This does not deny the fact that there are high points in China's development: its big GNP in absolute terms, its high rate of economic growth, and the foreign reserves of above US$3 trillion.
But the fact remains that while China has become a big economic power in absolute terms, it is still a middle-level developing country, with the socio-economic problems that most developing countries have.
And if China is pressurised to take on the duties of a developed country and to forgo its status and benefits of a developing country, then many other developing countries that are ahead of China (at least in per capita terms) may soon be also asked to do the same.
Thus, China's fight to retain its developing-country status is of interest to other developing countries, for they will be next, if China loses that fight.
(* Martin Khor is the Executive Director of the South Centre.)

9.6% in 2008 while World was at -0.8% growth just proves how strong Chinese economy became. And I do believe if China wanted to to save the world it can do it. Majority of developed countries, including USA and UK are already heavily import dependent on China.