The Roots of China’s Rapid Recovery

BEIJING – China’s GDP is estimated to have grown 8.7% year on year in 2009 – once again the highest rate in the world – with the fourth-quarter increase reaching 10.7%, compared to 6.3% in the fourth quarter of 2008. For much of the world, China’s ability to shrug off the global financial crisis and maintain a strong growth trajectory in 2010 and 2011 seems too easy.

But securing China’s growth has been anything but easy. The strong, decisive, and deftly timed stimulus policies at the start of the financial crisis did, of course, play a major role in China’s quick rebound. As early as October 2008, when the crisis first hit, China’s government adopted a comprehensive policy package designed to prevent the economy from sliding further. The fiscal deficit was equivalent to 3% of GDP in 2009, which generated 3% GDP growth, while the deficit in 2008 was literally zero.

The country’s so-called “moderate relax” monetary policy also played its part by allowing bank lending to expand by almost 34% in 2009, with M2 money supply growing by 27%. Monetary growth may increase inflationary pressures and the risk of an asset bubble down the road, but it helped ensure that China’s economy did not fall into a vicious downturn when the financial crisis hit. Other policy moves aimed at boosting demand in the housing and auto market also proved effective.

But China’s crisis management is only part of the story. It does not explain why other countries that took even stronger measures failed to generate a similarly rapid recovery, or why China’s government seems to have more room than others for policy maneuver.