China’s economy grew 8.7 percent in 2009. This was more than the 8 percent target, despite the global recession that caused global output excluding China to fall about 3 percent. China’s growth outcome is substantially higher than projections made in early 2009. For instance, in our World Bank March 2009 Quarterly Update we projected 6.5 percent GDP growth and some other forecasts were even lower.
How did these forecasts come about and what lessons can we draw from the experience of China’s growth in 2009? I cannot speak for my colleagues at the World Bank, let alone for other economists. But, all in all, while I have learned important lessons, I am not sure how differently I would see and do things if again presented with a situation like we were in a year ago.
A year ago, amidst dire projections for the world economy, China’s government had already announced and started to implement its RMB 4 trillion (US$ 585 billion) stimulus package. Spread out between the fourth quarter of 2008 and end 2010, this package was clearly going to boost domestic demand substantially. But the impact of the package was substantially smaller than the scale (equal to 12 % of 2009 GDP) suggests, since not all of the spending included in it was new.
Given the size of the package, China’s growth fundamentals, and the fact that China’s financial sector felt little direct impact from the global financial turmoil, we thought China’s economic growth would be much higher than that in the rest of the world. However, we also knew that China’s real economy is integrated into the global economy via trade and inward FDI and would thus receive a large negative shock. Indeed, with gross exports at more than one third of GDP in 2008, China has been more dependent on the global economy than other large emerging markets such as India and Brazil.
Forecasts are conditional on assumptions and projections of economic policy. We thought that, given the size of the export shock, it may not be optimal to try to meet a growth target that was set before the scale of the global turmoil was known, especially given that the growth we projected was still very respectable. In this connection, we also thought that, to mitigate the impact of the economic slowdown on households, putting more emphasis on using and beefing up the social safety net would make the response less costly than largely pursuing general infrastructure-oriented stimulus. In all, we thought that under our assumptions on fiscal and monetary policy, growth could well be lower than 8 percent in 2009.
During 2009, actual developments differed from our expectations in a few ways. It became clear how strongly the government felt about meeting the GDP growth target, in spite of the external circumstances. Also, in the end, the government did not use the social safety net much and relied predominantly on general stimulus policies, combining fiscal and monetary policy. On the fiscal front, the result was an increase in the fiscal deficit of about 3 percent of GDP in 2009, roughly as planned. On the monetary front, however, the expansion was much larger than anticipated. New lending—on infrastructure projects and other traditional clients of the banks—was almost 30 percent of GDP in 2009, or double the target announced in early 2009.
In all, China’s stimulus provided a massive boost to domestic demand. We estimate that domestic demand grew 13.7 percent in 2009, in real terms (contributing 12.6 percentage point to GDP growth). This offset the negative contribution of net external trade.
I take away several things from this experience:
· In contrast to what some have concluded, China’s real economy is strongly affected by the global economy, via exports and inward FDI. The conclusion that, with overall growth being so good in 2009, China’s economy turns out to be little dependent on the world economy is not correct. Net external trade subtracted an estimated 3.9 percentage point from GDP growth in 2009. It was the massive stimulus-driven increase in domestic demand that allowed growth to be so robust.
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· Governments around the world made different choices in 2009 on how much and how to dampen the impact of the global recession. Compared to other governments, especially European ones, China relied much less on using and beefing up the social safety net. China relied largely on general stimulus spending. It will hopefully take a long time before a similar shock occurs. But, when it comes, China’s government again needs to decide on how much and in what way to respond. These decisions will depend on many factors, including the fiscal space, the tolerance for large increases in fiscal and quasi fiscal spending, and the confidence in the functioning of safety nets.
· In China’s institutional and economic setting, stimulus measures can be introduced rapidly and effectively. With active participation of local governments and banks, the central government’s stimulus plans can be leveraged by local government stimulus and monetary expansion (indeed, as some remarked, given the incentives guiding local governments, expanding the macro stance is much easier than tightening it). Thus, if, as was the case in 2008-09, the government has the policy space and feels strongly about boosting overall growth, an impressive government-led domestic demand surge can be triggered. In all, an estimated 7 percentage point of the GDP growth in 2009 came from government-influenced spending (investment and consumption).
· China’s macro fundamentals are good enough, and China should be able to deal with the medium term consequences of the stimulus measures. But, such a stimulus as took place in 2009 cannot be pursued for too long. Indeed, on the monetary side the expansion was larger than policymakers had initially planned. The government is now rightly working on containing the monetary expansion and is likely planning no further increase in the fiscal deficit in 2010.