A package worth 460 billion euros is directed towards infrastructure spending

The decline in exports is being compensated by the Chinese authorities through the stimulation of domestic consumption. In January, lending began – transferring 175 billion dollars directly ‘pumped’ into investments, which, along with other measures, guarantees a quick exit from the crisis

Written by: Vanja Figenwald
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Recession is a deceptive term that often does not accurately reflect the real state of affairs. In fact, it could be said that recession is in the eye of the beholder. For example, when you say ‘recession in America’, it means record unemployment, the collapse of the financial system, a change in political, and seemingly social direction, the brink of collapse for household names like GM and Chrysler, etc. However, when you say ‘recession in China’, the picture is largely different – a decline in growth, but still significant growth. In numbers, it is a drop from around ten percent (there is rarely consensus on the exact growth figure when it comes to China) to, say, seven. Chinese Premier Wen Jiabao has recently emerged as a political star that China has not seen since Mao, confirmed by his appearance at the World Economic Forum in Davos, where every sigh of his was analytically interpreted in detail, before he went on his way, on a ‘journey of confidence’, assuring all interlocutors of China’s rapid recovery.

It is clear that it is the job of the Chinese Premier to convince the world of the good state of the Chinese economy, but the more important question is how right he really is. The last quarter of last year showed the worst result for the Chinese economy in the last decade, with growth of only 6.8 percent, high by general standards, but low for China. Exports, the absolutely most important engine of Chinese growth, began to decline, resulting in tens of thousands of bankruptcies and the loss of 12 million jobs for migrant workers (a Chinese specialty that refers to the movement of workers between cities and villages), with a large part of exports directed precisely at the worst-hit America, China’s most important trading partner. Last year also wiped out nearly half of all Chinese toy manufacturers, 49 percent, but at the same time, China recorded a growth in toy exports, albeit of only 1.8 percent.

Smart investment in development

However, although China has so far been primarily focused on the USA, the scope and strength of its production allow it to maneuver towards other markets less affected by the crisis. Huge Chinese foreign exchange reserves, estimated at two trillion dollars, are largely directed towards purchasing foreign debts, primarily American, so China has, de facto, long been quietly financing American consumption of its goods.

Starting from the bottom, offering exclusively cheap labor as a comparative advantage, it has smartly invested in its own technological, infrastructural, and social development by suppressing consumption, which is now showing as huge capital. It has done what, for example, Croatia could not. The otherwise debatable political system has proven to be yet another Chinese advantage in this case, as the autocratic regime, unlike the democratic one, which fears elections every few years (giving various concessions to the people and interest groups), could relatively easily force people to spend little and slowly.

This also means easy implementation of all necessary but unpopular measures to combat recessionary forces. China can ultimately compensate for a possible export deficit by directing production towards domestic demand, a vast and underutilized market hungry for goods. The banking system is almost entirely in state hands and at the state’s disposal, a key element of control, distribution, and direction of capital flows.

Comparative advantages

Decades of money storage, furthermore, allow China generous packages of fiscal incentives and other measures that developed economies can increasingly afford less, which is happening these days with the announcement of a package worth 460 billion euros directed towards infrastructure spending, making the loss of 12 million migrant jobs seem like a walk in the park. China has money to spend and invest in itself. The exchange rate, another source of envy and accusations from some Western economists and analysts, is also under the watchful eye of the authorities, which have allowed it a middle ground, or controlled fluctuation, thereby enabling a comparative advantage in the global market. There have been attempts, mostly from America, to explain to the world that China is actually to blame for everything because it lent money to Americans that they did not earn to spend while at the same time the Chinese themselves were shamelessly saving and investing in themselves. This clever mental acrobatics has been dubbed ‘imbalance in the global economy’.

According to all that has been said, China may be the best-positioned economy in the world for a quick and relatively easy exit from recession, as confirmed by the latest indicators from last month. The key indicator of Chinese production showed a recovery trend – the National Purchasing Managers’ Index rose from 41.2 points to 45.3, suggesting a recovery in orders for production, both externally and within China itself. This index could be misleading in itself as it is indeed early to speak of a lasting recovery (anything below 50 points is still contraction), but it is noteworthy that lending has also started in China, transferring 175 billion dollars directly ‘pumped’ into investments, which is a record for bank lending.