Britain’s economy should learn to speak a little Chinese
- John Ross is visiting professor at Shanghai’s Jiao Tong University where he writes a blog on globalisation. The views expressed are his own. -
The success of Chinaâ€™s economic stimulus package has attracted increasing attention in Britain and internationally for two reasons. The first is simply its importance for the world economy. Second whether there are general lessons to be learned.
The impact of Chinaâ€™s economic programme can be seen in that it is likely the whole of world economic growth this year in net terms will be accounted for by China.
The sceptics on Chinaâ€™s stimulus package have been disproved by the facts. Chinaâ€™s GDP growth this year will be eight percent or slightly above. Chinaâ€™s GDP grew by 7.9 percent year-on-year in the second quarter and was accelerating â€“- the best private sector estimates are Chinaâ€™s economy grew at an annualised 13-15 percent in the second quarter. Urban investment increased 34 percent and as producer prices were dropping the real increase was probably around 40 percent. Retail sales increased 15 percent.
This is a stellar performance in conditions where most major world economies will shrink this year. Compared to these results talk of possible “green shoots” in other economies relates to minor improvements.
Chinaâ€™s economy is not large enough that its growth is able by itself to turn round the world economy. But it is sufficient to having a stabilising effect in East Asia with beneficial knock on consequences. Those wanting further detail on the scale of contribution of Chinaâ€™s growth to the world economy should read Professor Danny Quah, of the London School of Economicsâ€™, excellent recent paper on Asian growth.
But if the significance of the scale of the international impact of Chinaâ€™s economic performance is evident are there policy lessons which can be drawn by Britain?
Evidently the main features of Chinaâ€™s economic stimulus package cannot be copied by the UK. Chinaâ€™s economic growth is being powered by large investment programmes carried out by its state owned companies.
Chinaâ€™s emphasis on infrastructural investment can, and should, be copied in the UK in the limited areas of housing and transport. While overall UK investment has fallen by 15 percent, investment in housing has fallen by 30 percent and in transport equipment by 35 percent.Â This is not a decline but a collapse in which direct intervention is required if permanent structural damage is to be avoided.
But in infrastructure as a whole the necessary structures simply do not exist in the UK to copy Chinaâ€™s success. This is unfortunate because, as anyone who visits Shanghai or Beijing knows, in many areas Britainâ€™s city infrastructure now lags behind Chinaâ€™s but nothing can be done about it except in some defined fields.
There is one area, however, in which direct lessons can be drawn from China â€“- banking. The UK government is rightly desperately attempting to increase bank lending in order to counter the economic downturn. As is also well known it is having little success in these efforts despite hundreds of billions of taxpayers money put into the UK banking system.
In China this problem does not exist. The state owned banks can be, and are, instructed to increase lending. The second part of Chinaâ€™s stimulus package, after the investment programmes, is therefore a rapid increase in bank lending — new loans in the first half of 2009 were $1.1 trillion and M2 to June rose by 28.5 percent providing an extremely strong counter-recessionary impulse.
Vince Cable, the Liberal Democrat’s Treasury spokesman, has rightly repeatedly pointed out the absurdity of the current situation with UK banking. All UK banks today exist only due to taxpayer subsidy — although Barclays and HSBC did not receive taxpayers equity, they would not be profitable operating without the taxpayer funded guarantee and economic stimulus schemes.
Yet despite UK banks existing only due to the taxpayer, Chancellor Alistair Darling is reduced to ineffectually pleading with them to increase lending. No such problem exists in China.Â A side effect is that China now has the most valuable banks in the world by market capitalisation â€“- but banks simultaneously doing the key job of expanding lending. In China, private and public interest are properly aligned within the banking system.
For the reasons outlined Britain cannot copy all of Chinaâ€™s stimulus measures even if it wished. But on infrastructure and banking it should learn to “speak Chinese”.