Briefing Notes for the Launch in Beijing, 6 May 2010
Impact of the crisis
- When the global financial crisis hit Asia-Pacific towards the end of 2008, GDP growth in China decelerated. GDP of China dipped to 6.2% in the first quarter of 2009 over a year earlier, representing the slowest growth since records of quarterly growth began in the 1990s.
- Measured on a Quarter-on-quarter basis, China emerged as the first economy to move out of the global economic recession, with the economy bottoming out in the fourth quarter of 2008 at 4.3%.
- The crisis largely impacted China through trade channels, with plunges in import demand from developed countries amounting to over 25% for Japan and the United States, and the European Union. The decline in exports was already evident by the end of 2008 and exports fell steeply in the first half of 2009. Year-on-year decrease in merchandise trade was over 20% in China in the first half of 2009. Yet, in tandem with the slowdown in exports, imports also adjusted. As a result, the trade surplus was $198 billion in 2009, 16% of exports.
- The global crisis affected inward flows of foreign direct investment (FDI) in East and North-East Asia. China has exhibited the most dynamism, having seen robust FDI growth of 15% in 2007 and 30% in 2008. But in 2009, FDI declined by 13%. Thanks to the current account surplus, however, reserves built up even more rapidly; by the end of 2009, Chinese foreign assets surpassed $2.4 trillion, the highest in the world.
Rebound under way
- The government responded to the crisis with a huge stimulus package – 4 trillion yuan ($585 billion). Almost half of this, 1.8 trillion yuan, was for construction of infrastructure including railways, airports and environmental and post-disaster construction. As a result, urban fixed-asset investment, which had increased by 26% during both 2007 and 2008, rose even more quickly — by 31% in 2009. A large part of the fiscal stimulus was also used by the banking sector to extend loans on concessional terms. Household consumption also continued to grow, though retail sales growth decelerated from 22% in 2008 to 16% in 2009. The pronounced rebound of 80% in the stock market brought recovery of all the ground it had lost due to the crisis, spurring growth to reach 8.7% in 2009.
- As such, notable recovery was seen in the second half of the year. In the third and fourth quarters, GDP rose to 9.1% and 10.7% year-on-year respectively, the highest growth rate in the region. For 2009 as a whole, GDP growth was 8.7%, compared to its pre-crisis trend growth of 11%.
- Lack of inflationary pressure in the subregion going into the crisis permitted accommodative monetary policies as part of stimulus measures. Deflationary pressures were much more evident in this subregion than in others, following marked corrections in oil and food prices and excess capacity. In February 2009, consumer prices in China fell to -1.6% from a year earlier, while over the whole year prices declined to -0.7%.
- While aggressive fiscal stimulus was possible because of the accumulated budget surpluses, the scale of spending has inevitably put pressure on budgets going forward. During the recovery phase, the Government has begun to consider the timing and prioritization of their exit strategies to ensure fiscal probity without endangering renewed growth momentum. Other than the impact on Governmental budgets, delay in removing stimulus creates the risk of asset price bubbles.
- Stimulus policies across the subregion have displayed some positive signs of moving economies to a new growth trajectory based on new industrial sectors and more inclusive and sustainable demand. The Republic of Korea and China have been notable for including significant initiatives to achieve the twin goals of promoting the emerging field of “green” technology as well as shifting domestic consumption and production patterns to a more environmentally sustainable path. China had the world’s second largest component of a stimulus programme dedicated to environment-related projects, accounting for 34% of its total stimulus spending. Earlier China had incorporated significant environment-related spending into its 11th Five-Year Plan (2006 to 2010).
From rebound to sustainable recovery
- By mid-2009, China was showing signs of a rebound. Yet some risks remain — the recent rebound could turn into a second dip if global financial weakness returns, bank lending turns out to be excessive, or if Government exits prematurely from expansionary fiscal policies, or if the private sector does not fill the investment gap. The key question is how to turn the recent rebound into a sustained recovery.
- China is expected to continue to lead growth, expanding by 9.5% in 2010, with investment in infrastructure helping to remove supply-side constraints and spur even faster growth beyond 2010. A brighter economic outlook should also encourage further investment by the private sector. China is likely to emerge in 2010 as the world’s second-largest economy.