By Michael Spence
China has weathered the present financial crisis better than most countries, for a number of reasons. It reacted very quickly to the collapse of external demand with a domestic stimulus package of 9 percent of GDP in both 2008 and 2009. The stimulus package in China was heavily weighted toward investment, especially in infrastructure, which is something they know how to do. To some extent, the Chinese relied on past experience in the ’97–’98 currency crisis in Asia, a storm they weathered without depreciating the currency but instead with what was then a large domestic stimulus pro-gram. China also eased credit quickly, and used their massive reserves to stabilize the currency.
The result is a rapid transition to high growth, with projections for 2010 in the 9 percent and above range. On the other hand, as with other countries, the stimulus and other dimensions of the emergency response are not a permanent solution. There is a growing concern among knowledgeable Chinese policy makers and academics with regard to two things. One is a return to the old ways, meaning the strategies and policies of the past thirty years that focused on investment and labor-intensive exports, policies that worked well but have outlived their usefulness. The influence of those in government and in the labor-intensive sectors that are set to decline is still substantial. Their hand has been at least temporarily strengthened by the crisis.
The other is a deep concern about overconfidence in the economy’s resilience in the face of some daunting short- and medium-term challenges. Managing to bounce back in the worst global crisis in eighty years — and by far the largest in the history of the PRC — is impressive. But, then, the hallmarks of Chinese growth have been rapid learning, a long time horizon, a willingness to support and encourage constant change, and a pragmatic problem-solving approach to a long process. These will likely reassert themselves and displace any short-term tendency toward triumphalism. Nevertheless, the risk is there.
China is entering upon a complex set of transitions that will build the base for its path to advanced-country status in the next twenty-five years. After three decades of sustained high growth and a remarkably successful, rapid, and effective policy response to the crisis, confidence is justifiably high.
China faces several parallel and related rebalancing challenges that are crucial for its internal growth and development, as well as for its relations with the rest of the global economy. Among them are: