Managing China’s Crisis Management

The Chinese government has signaled that it is beginning its exit from expansionary measures aimed at mitigating the impact of the global financial crisis and recession. A change of policy can't come soon enough: China’s long-term growth prospects may be seriously affected if the authorities fail to tackle the economy’s structural problems head on.

BEIJING – China’s “Central Economic Work Meeting,” comprising top government decision makers, recently chose to continue the expansionary fiscal and monetary policy launched in the last quarter of 2008. But it also called for greater emphasis on transforming China’s development pattern and rebalancing its economic structure.

The move thus signaled the start – well ahead of other countries – of China’s “exit” from crisis-driven economic policies. Indeed, China should accelerate its change of course. While expansionary policies have succeeded in ensuring a V-shape recession, their medium and long-term effects are worrisome.

First, China’s crisis management has made its growth pattern, marked by massive investment demand, even more problematic. China’s investment rate is extremely high in comparison with other major economies, and has been increasing steadily since 2001, creating first overheating and then overcapacity. Until the global financial/economic crisis that began in 2008, however, strong export performance concealed China’s overcapacity problem, which, thanks to the stimulus package, is now set to become more serious. Indeed, China’s investment rate may have surpassed 50% in 2009.

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