Positive Developments in Chinese Economic Growth. By Tom Jensen, Secretary General, Danish-Chinese Business Forum

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The massive stimulus package has proven itself remarkably successful in getting the Chinese economy through the financial crisis. Impacting in the second quarter of 2009, the growth accelerated from 6.1 percent in the first quarter to 7.9 percent in the second quarter. A majority of indicators predict that the official forecast of 8 percent annual growth target will be met. Most recently, Goldman Sachs has raised the estimates further to an impressive 9.4 percent, towering over the World Bank’s conservative 7.2 percent estimate. The growth in the Chinese economy can be attributed to three key factors: a 4 trillion yuan ($585 billion) stimulus package, a record growth in credit, and an improving demand for exports. These three factors have facilitated the continued expansion of the world’s third biggest economy.

1. Stimulus Package
The stimulus package was positioned as a confidence-building measure by the government from the very beginning. The main focus of the stimulus package has been on mega-projects, primarily large-scale infrastructure, to increase demand for cement, steel and other construction materials, which has been hit by the economic slowdown. The Economist’s special report on the Chinese stimulus package asserts that government investment is “designed to act as “seed funding” to attract further investment form co-funding local government as well as from private investment.” The report, however, laments that the stimulus package leaves a number of underlying problems in the Chinese economy unaddressed, such as the lack of a social safety net. The Economist nonetheless concludes that the stimulus package has been central in preventing the Chinese economy from slowing down any further and praises the central government for its prompt response to the global crisis.

China Turns West
Chinese government officials have also used the stimulus package to develop infrastructure and improve economic growth in the less developed western regions. At a recent meeting in the leading group under the State Council, chaired by Premier Wen Jiabao, guidelines were passed to ensure a stable and fast economic growth in this region. More funds would be put into the areas for infrastructure construction, including railways, roads, airports and water conservations projects.

2. Growth in Credit
Following a “moderately loose” monetary policy, the Chinese government has greatly encouraged lending. Banks have every incentive to dole out more loans: “We will continue to expand lending and other business to implement the government’s fiscal and monetary policy and help economic growth,” Bank of China’s spokesman Wang Zhaowen has said. The Chinese government is clearly more concerned with keeping the economy growing rather than with preventing a rebound in bad debts in the future. According to the statistics of the central bank, the balance of broad money supply (M2) in the end of March was 53.1 trillion yuan, increasing by 25.5 percent year on year. While the world is confronted with fund shortage, the rapid M2 increase of China confirms that a moderately loose money policy is effective at present and the liquidity of the Chinese market is generally ample.

3. Improving Demands for Exports
In the first half of 2009, Chinese exports surpassed those of Germany for the first time, making China the largest exporter in the world. It remains uncertain whether this projection will hold for the whole of 2009, but it is a sign that the Chinese economy is strong and the momentum is on the side of the Chinese. Although exports have fallen fairly dramatically from previous years (more than 20 percent in the first two quarters), falls appear to have petered out over the summer. A return to the export levels of 2007 and 2008, however, requires a full recovery of the American market – a feat China clearly has little influence over. But the fact that exports have begun to improve remains a sign of strength in the Chinese market.

Chinese Growth and Danish Businesses
This is good news for Danish businesses with interests in China. Not only will an economic recovery increase demands for Danish exports to China, but the massive stimulus package also presents opportunities for Danish firms, with billions of yuan being channelled into industrial sectors, where Danish firms have a competitive advantage, such as ecological and environmental projects, for which the stimulus package has already budgeted 210 billion yuan.
The positive signs from the Chinese economy are also supported by Danish-Chinese trading figures. Althugh the overall Danish export figures showed an astonishing 23 percent drop in the first six months of 2009 (as compared to the same period in 2008), Danish exports to China nevertheless grew by 6.5 percent, which is an impressive achievement, considering the world’s current economic situation.

Future Growth
Wen Jiabao, premier of the State Council, has recently announced that the government’s stimulus policies will continue through 2010. The Chinese economy of course remains dependent on exports, and as long as its main exporting markets are weak, the Chinese economy will be dependent on government investment for continued economic growth. This is clearly a weakness in the Chinese economy and is a sign that the Chinese economy is still immature. The political leadership in China has, however, reacted professionally and promptly, using the monetary and fiscal policies at its disposal. This has averted a major economic slowdown in East Asia and has of course contributed positively not only to the Chinese recovery but also to the international economic recovery. The central government has once again shown that it means business when it puts economic growth above everything else.

Chinese Car Sales Grow Despite Financial Crisis
Vehicle sales in China skyrocketed by 90 percent in August compared to last year. Current projections estimate an overall year on year growth of 30 percent - a sign that Beijing-based subsidies and tax cuts have restored consumer confidence.

Private Consumption?
The stimulus package has clearly worked to cushion the impact of weak exports. Despite rising sales of items such as automobiles and household appliances, the ratio of private spending to GDP in China today has actually fallen, relative to Chinese spending levels of a decade ago. Spending by Chinese households remains too low to drive the Chinese economy forward. However, with the Chinese per capita GDP reaching $ 6000, there is empirical evidence from other developing countries that private consumption will begin to take off, as China moves from a developing to an industrialised nation. The exact timing is uncertain, but when private consumption levels begin to rise, China will be contesting the US’ title of the world’s economic engine. Pricewaterhouse Coopers has indeed projected that the Chinese economy will overtake the United States’ in 2025 and anticipates a further growth to 130 percent the size of the United States’ economy by 2050. To reap the benefits of such developments, Danish companies selling consumer goods should already now begin to prepare their strategies for this leap into the domestic Chinese market.

(Source: Nomura)