The Chinese Lesson

It has been more than a quarter of a decade since the financial crisis first hit the airwaves. Since then, the world’s largest economies have banded together to bring the global economy back to its feet. While it is true that the world has been slowly recovering, it is still very fragile.

For one, growth is varied – some even say diverging – across different regions. While some major economies have been expanding, others have barely been growing! There are even those who have fallen back into recession.

GDP Growth of Major Economies

The high level of unemployment in developed nations is also a huge problem. In the U.S., joblessness stands at 9.1%. The underemployment rate that includes workers who would rather work full-time but can’t is stuck at around 16%. Euro zone shares the same story, as the percentage of the labor force without jobs is at 9.9%

In U.K., things are little less bleak as the unemployment rate fell to 7.7% from its 8.0% peak in March. The same goes for Japan. The country’s unemployment rate was reported to have dropped to 4.5% from 4.7% last month.

Inflation is also starting to increase at a rapid rate *cough* gas and food prices *cough*. Generally speaking, rising inflation isn’t THAT bad, but when it is accompanied with slow growth, then it becomes a problem.

But China appears to have everything under control.

In response to all this, China has been implementing economic policies that will gradually shift the economy away from one that was export dependent, to one that would be driven by strong internal demand.

According to Chinese Premiere Wen Jiabao, China did this by engaging in a stimulus program that focused on maintaining growth, the improvement of standard of living, and advanced reform.

The result?

Well, so far, the program seems to be working. Chinese GDP grew at an average rate of 9.7% from 2008 to 2010, which was far better than what other developed nations did.

Investment has also picked up, as the government made use of a 4,000 billion Yuan investment program.

Over the past few years, over 10,000 km and 300,000 km of railways and roads have been constructed. For those of you who don’t understand the metric system, that’s over 60 cross country trip across the U.S.!

Meanwhile, over 6.5 million rural and urban homes have been built in areas that were affected by the Wenchuan earthquake in 2008.

The stimulus program also seems to have pumped up domestic demand, as the trade surplus to GDP ratio has fallen from 7.5% in 2007 to just 3.1% last year. This indicates that exports are playing a smaller role in the feeding Chinese GDP.

While China still has a long way to go before having a truly balanced economy, these policies are all small steps in the right direction. Chinese officials understand the central role that China plays in the rebalancing of the global economy.

The Chinese market is HUGE and the continuous improvement in the domestic demand will help other economies get back on their feet and get their trade deficits back in check.

With the Chinese government entering a new 5-year plan, Jiaobao vows that the Chinese government will continue to promote a more balanced economy geared towards industrialization and urbanization.

Over time, the Chinese economy will become more internationalized as the country will coordinate with other countries with regards to macroeconomic policy.

In time, these efforts will hopefully lead to a global economy that is more stable and sustainable, one where the collapse of one economy would not be the downfall of the entire system.

  • Al2cand

    Still, the thousands of houses and kilometers of rails have to be profitable… As we read everywhere, entire villages are left empty in many of these newly built infrastructures and though I don’t know about how usefull will prove to be this large network of railroads, I suppose that it will take some long time for their transportation industry to go with them.