China Confronts the Global Meltdown

BEIJING – For three decades, China has been growing at an average annual rate of 9.8%. For most of this time, world markets were favorable, with no major global economic or financial crisis or slowdown. Yes, there were regional crises such as Southeast Asia’s financial turmoil of 1997-1998 or the collapse of Japan’s housing bubble in 1990 and America’s high-tech bubble in 2000. But none of these proved a serious obstacle to China’s long boom.

The past three months, however, have seen a significant slowdown in China’s exports, domestic investment, industrial output, and tax revenues. A major slowdown seems to be looming. Will China’s rapid growth persist?

I believe it will. Within China, the current slowdown is mostly homemade. Since 2004, China’s government has sought to cool an overheating economy by bringing the growth rate down from 12% to a more sustainable 8-9%. It even began to tax exports in order to reduce the trade surplus.

Of course, if Chinese policymakers could have predicted what has now happened in the world economy, they might have been less stringent in trying to rein in growth. But one reason that China has been able to maintain growth over the past 30 years is that it started counter-cycle macroeconomic intervention during the boom times, rather than waiting for a collapse. China’s government never believed that it should leave what happens in the economy solely to the market. When there is no big bubble, there is no need to worry about a big crisis.