China will not save the world economy

Published: June 21 2009 19:04 | Last updated: June 21 2009 19:04

Both too much and too little are expected of China’s response to the economic crisis: too much, because the Asian giant can play only a modest role in rescuing the world economy; too little, because few believe the economy will be radically changed. The stimulus programme is helpful, for China and the world. But the real challenge is structural transformation.

As the World Bank’s June quarterly update shows, China’s response to the crisis has been a success. It forecasts economic growth at 7.2 per cent in 2009. This is a long way down from the 11.9 per cent in 2007. But it would be viewed as a triumph anywhere else. For such an open economy to cope with a fall in the rate of real export growth from 20 per cent in 2007 to 8 per cent last year and a forecast of minus 10 per cent this year is remarkable.

Nevertheless, the impact of China’s stimulus on the rest of the world will be modest: the country generates only 7 per cent of global output, at market prices; more-over, the bank also forecasts a decline of 5 per cent in real imports this year. The net stimulus China will give to the rest of the world will only be around 0.1 per cent of global output in 2009.

Certainly, China needs to sustain demand. It can also afford to do so: the fiscal deficit is forecast at a mere 5 per cent of GDP in 2009 and the risk of an upsurge in inflation is quite small.

Yet there is a danger. It is that what is needed in the short term makes required longer-term reform more difficult. As the World Bank notes, this stimulus is dependent on “government-influenced spending”. That can only be a stop-gap. Both the opportunity created by the crisis and the time given by the stimulus must be used to shift the pattern of growth, instead.

The rapid past expansion of gross and net exports is not going to return. China must move, instead, towards an economy led by private rather than public demand, towards consumption rather than investment, towards labour-intensive services rather than capital-intensive industry and towards reliance on domestic rather than foreign markets.

These shifts demand a number of linked reforms: opening more sectors to private competition; raising interest rates paid by privileged borrowers and to hard-pressed savers; forcing state-owned enterprises to pay dividends and using the proceeds to support public services; and introducing a decent social safety net.

For China, this crisis is a golden opportunity. It must be seized.