There are still many unstable factors, but the worst time is over. The performance of China’s economy will have significant impact on the global recovery as China is now the third-largest economy, the fastest growing economy, and accounts for a large portion of international imbalances. In this article, we will look at what China’s stimulus package and its macro policies have done to its economy.
Stimulus Package Drives Up GDP
According to recent statistics released by Beijing, China’s GDP is likely to grow about 8 percent this year. Why? Even until just three months ago, few economists thought this would be possible.
China’s GDP growth rates declined from around 13 percent in 2007 to merely 6.1 percent in the first quarter of 2009. Exports, the driving force of China’s growth, have declined for more than 20 percent for almost a year.
Apparently the growth rate picked up in the third quarter. China’s stimulus package of $586 billion in the last year is estimated to have pushed the economy through investment to grow by about 2 percentage points in 2009, more than it otherwise would have grown.
Statistics show that China’s economy picked up in just the last two to three months. However, the economy as a whole is still unstable. Obviously such growth costs a lot. Namely, China spent 4 trillion yuan in capital investment last year. China’s money supply had a huge jump—up 30 percent year-over-year in the first half of this year.
Moreover, new bank loans of 7,370 billion yuan (US$1,079 billion) were issued in the first half of the year, an increase of nearly 200 percent over the same period last year. All these measures have been used to prop up the growth rates.
Stimulus Props Up Stock and Housing Markets
The effects of such a huge investment and new loans can be seen through China’s stock and housing markets. Let’s look at two figures about the trends in China’s housing and stock markets.
From the graphs, one can easily see that there seems to be a direct link between the capital investment of 4 trillion yuan as well as the large amount of new loans and the time sequence of the soaring Chinese stock and property markets. Figure 1 shows that the Chinese stock market (represented by the Shanghai Composite Stock Index) had been falling from October 2007 to reach the bottom at around the end of last year and early this year. Then it rose sharply afterward.
The timing of these huge movements in both the stock and housing markets indicates that a large amount of money from the stimulus package has gone into the stock and housing markets. As is well-known, Beijing invested 4 trillion yuan at the end of last year, and new loans were also provided between the end of last year to the beginning of this year. New loans in the first half of this year increased by nearly 200 percent from the same period last year, and the money supply grew by nearly 30 percent.
However, isn’t it strange that while China’s stock and property markets continue to rise, China’s overall price index has been falling? This can be explained in two ways. First, China’s economy is very weak, and the stimulus money has not gone into the economy.
Second, much of the money actually has gone into the stock and property markets. Earlier this year, a China finance officer estimated that more than 20 percent of the money went into the stock and property markets.
Weak Exports and Domestic Consumption
How is the current Chinese economic situation? Let’s look at some other indicators. Both the consumer price index (CPI) and the wholesale price index (WPI) have been declining, and the prices of almost all sectors have been declining. The deflationary environment indicates that the Chinese economic situation is still rather weak, even though the third quarter GDP reportedly grew 8.9 percent from a year ago.
