News Room - Business/Economics

Posted on 30 Dec 2008

China’s response to economic crisis decisive

 

The good news is governments around the world are well aware there is a massive negative spiral in the global economy. The bad news is government actions taken thus far, such as US$1.5 trillion in stimulus packages announced worldwide, near zero interest rates in the US, etc, have not (yet?) been able to slow the pace of this negative economic spiral.

 

As we watch the continuing efforts by world governments and central banks to fight this crisis, we ponder at the big contrast in response between Western nations and China, and wonder what kind of economic future we will inherit.

 

The solution for economic recovery is well known even in a crisis of this global scale: remove troubled assets from the banks, recapitalise the banks to lend again and stimulate the global economy.

 

History has shown us during the housing bubble and banking crises in Sweden (1991), Finland (1991), Norway (1987) and Spain (1977) similar solutions were implemented effectively by the respective governments; it saved the banking system and paved the way for economic recovery.

 

The key to a successful recovery is fast, aggressive and accurate government implementation of the solution.

 

In these times of extreme economic crisis, Asia’s rich centrally planned governments seem to be able to carry out the necessary prescriptions in a quick and direct manner. China, Singapore, Hong Kong governments, among others, have acknowledged the severity of the crisis – and are acting fast (there is a great sense of urgency to get things done).

 

We believe China’s response has been impressive so far, implementing economic stimulus policies as Premier Wen Jiabao said on Nov 10 “…in a fast, aggressive, accurate and in an effective manner.”

 

“Fast” - because economies in crisis need to quickly arrest the rapid erosion of confidence. As a centrally planned government, China’s top level government can execute decisions on stimulus projects fast at the provincial level whereas in many other countries, democratic and bureaucratic steps such as Parliament or Congressional approvals and a tendering process may often delay implementation.

 

“Aggressive” - given the scale of the economic crisis, an aggressive approach is needed to boost confidence while a piecemeal approach is not likely to be effective. We have seen China announcing a 4 trillion renminbi (US$586bil) stimulus package (about 15% of gross domestic product) on Nov 10 followed by a massive housing stimulus package that will benefit 7.5 million low-income urban families and 2.4 million households in shantytowns on Dec 17.

 

“Accurate” - policies need to be accurate to minimise problems of leakages and counter-productive measures. China has done the traditional intervening on a macro level such as cutting interest rates by 2.16 percentage points to 5.13% since September in response to the crisis.

 

In addition, China’s government has gone one step further by taking surgical actions on the micro level when it deems necessary, such as setting up discount schemes for the white goods industry and buying up unsold houses by provincial governments and rent them to needy citizens.

 

“Effective” - even with fast, aggressive proposals, effective management is the key to implementation. China’s authoritarian communist system can cut through a lot of political red tape to implement various stimulus measures at the right places for maximum impact.

 

Comparatively, Western governments at the epicentre of the financial crisis have been fighting the battle seemingly always a few steps behind the deepening crisis.

 

We witnessed in October the repercussions of the delay in passing the US$700bil Troubled Assets Rescue Program (TARP) by the US Congress while last month there was bickering between Germany and other European Union governments over the implementation of a 200 billion-euro stimulus package.

 

Expectations for the soon-to-be announced Obama US$850bil (estimate) stimulus package for the US economy are high; by all accounts, this US stimulus package is already lagging behind global efforts due to the change in the US administration.

 

Will the stimulus package run the risk of being delayed by the Congressional approval process like in the TARP or perhaps be reduced and rendered ineffective by political consensus seeking? We are likely to find out in January but what is obvious between the China and the US stimulus packages today: one is already out and being executed while we wait for the other to show up.

 

In normal times, a democratic process may lessen abuses and distortion of the marketplace; but in a severe economic crisis where fast, aggressive, accurate and effective actions are required, China’s rich, centrally planned, authoritative governments seems to be able to mobilise and make decisions quicker in the face of an unfolding crisis compared to a consensus-seeking democratic government.

 

It is too early to say that China’s measures are effective but it seems to be much more proactive – faster, more aggressive and effectively getting out most of the measures that may help lessen the impact from the global economic crisis.

 

Countries in crisis may follow China’s lead on how to manage the negative economic spiral, but we just wonder if the future of capitalism and democracy is going to be flavoured with a dose of autocratic rule.