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Optimism about China's economy

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Stephanie Flanders | 14:44 UK time, Wednesday, 29 April 2009

For anyone who has spent the past two weeks thinking about Britain's finances, here's one big thing what happened while you were away: people got a lot more optimistic about the Chinese economy.

I had a good chat with Jim O'Neill, Goldman Sachs' chief economist yesterday. He could scarcely contain himself on the subject.

Chinese bank notes
The Chinese authorities have impressed the world before with their response to economic crises - for example during the Asian financial crises of 1997-8. This crisis is of a different order. But so has been the response.

As a share of the US economy, China's fiscal stimulus measures this year are larger even than America's. While the loosening of credit conditions is greater than any that O'Neill has ever seen.

All this policy seems to be having an effect. He's just raised Goldman Sachs' forecast for Chinese growth this year from 6% to more than 8%, and next year's from 9% growth to nearly 11%.

This optimism gets support from stories on the ground. Qu Hongbin and Sun Junwei, of HSBC, just returned from a tour of three big cities in inland provinces, which were never as dependent on exports as the coast.

They say that firms there are already benefiting from all the new infrastructure projects that the government is putting on stream. And consumer spending is holding up as well, growing at annual rates of close to 20%.

The national picture is also looking up. The volume of bank loans grew by nearly 30% in the first three months of the year. While the British were obsessing over their finances, China also reported a record month for car sales in March.

Before the G20 I said that the Chinese central bank governor, Zhou Xiaochuan, deserved credit for highlighting the crucial importance of more balanced global growth coming out of this crisis. But then, as now, the big question was whether the Chinese authorities were willing to follow that thought to its logical conclusion - that China itself would need to change, since one of the biggest imbalances in the pre-crisis system was China's surplus with the West.

Is the domestic demand-led growth we may see from China this year a sign of things to come? Possibly. None other than Dr Doom himself, Nouriel Roubini, recently returned from China saying that the authorities recognised the need for change.

But there is plenty of room for doubt. The government may have put on the domestic spending taps to avoid recession this year (and we should all be very grateful that they have). But when global demand for toys and everything else eventually picks up, there will still be plenty of Chinese firms eager to meet it.

More important, without further reforms, the Chinese economy that comes out of this crisis will still be hard-wired to save a ridiculously high share of its national income.

Thanks to a distorted financial system, firms - especially small ones - will still save a lot more of their profits than they do in other countries. And the sparse-to-nonexistent social welfare system will still mean that families save every penny they can, not just for retirement but for health and education expenses and to insure against the risk of being laid off. As Dr Roubini's own RGE Monitor points out, only 10% of the $600bn Chinese stimulus package this year is allocated to social welfare spending.

Even with reform, China would probably be a high saving economy. But it could save a lot less than it does. The excess means that it inevitably ends up with more than it can possibly invest at home. As I've discussed many times before, this export of Chinese savings is the flipside of its massive exports of goods.

No-one expects that imbalance to go away as a result of the authorities' efforts to date. Indeed, the IMF thinks that China's current account surplus will actually go up again this year, to nearly $500bn, though that's a smaller rise than in past years.

In short, it is very good news that China's economy seems to be picking up. But it's too soon to judge whether it will manage the long-term turnaround the global economy dearly needs.


  • Comment number 1.

    So now we'll be able to borrow more Chinese money to buy Chinese manufactured goods, so they can afford to lend us more money. Unless the Chinese are prepared to spend rather than lend we are just increasing borrowing.
    Only an economist could call this good news.

  • Comment number 2.

    The only real problem is trying to figure out what can be believed from the Chinese. Figures don't lie, but liars figure......this has certainly become more apparent worldwide but China has always been in the forefront of enhanced projections. Unemployment, that could lead to soical unrest is still a concern and the uneven distribtion of income between urban and rural areas continues to grow. Individual investors with particular manufacturing interest do not reflect the reality that China will have a difficult time if the other nations are not purchasing their products. Do you really think China will realize high percentage growth by selling toys?

  • Comment number 3.

    Yeabut!! - A friend of mine recently spent a month in southern China and reported back to me that in vast areas of China all you see if you look up is a haze and that 'the sun is never seen'. This is due to the photochemical smog englufing the country which is a side effect of its economic growth which far exceeds any benefit that growth has brought.
    Chinas economic growth has thus come at the expense of development, that is, a richer country, but with an environment which has, frankly been broken. the gains are measured in decades, the damage in millenia.

  • Comment number 4.

    China's hospitals, schools and roads are next to third world standards. Instead of investing in fancy stadiums, airports and skyscrapers to gain international face, they should seriously think about doing something for the people so they do not have to pay bribes to get decent medical attention whilst still wondering if the medicine they received is genuine.

  • Comment number 5.

    Are we sure that China will have more money "than it can possibly invest at home"?

    Is it not possible that the rapid increase in domestic consumption and consumer spending could lead to a nvestment of all those savings in domestic production capacity - and a positive spiral of domestic growth? In which case we should not hold out breathwaiting for the Chinese money to flow back into our economy.

    This could also result in a measure of price and wage inflation in China, which would mean that Chinese goods would gradually become more expensive over here.

    That is what I thought everyone meant by rebalancing: and fair play to them. It never seemed sustainable that we were able to pay Chinese workers so much less to make the goods than we paid our workers to stack them on the supermarket shelves.

  • Comment number 6.

    China has money, but we don't.

    In order to get our hands on some of China's wealth, Britain must sell something to China. But what exactly?

    (i) Defence manufactures - probably not
    (ii) Computer software - maybe
    (iii) Bank loans - no
    (iv) North Sea oil - maybe a little
    (v) Popular music - perhaps some
    (vi) Oxbridge degrees - possibly a few
    (vii) Cars - too many global manufacturers as it is, and none of them are British owned anyway
    (viii) Bespoke tailoring - not big enough supply base
    (ix) Actors, chefs and celebrity culture - of little real substance
    (x) British owned companies - their shares can be bought cheaply at present.....
    (xi) British assets and treasures - those paintings by Titian perhaps - or a couple of football teams - all the houses on Sandbanks - or a stately home or two.....

    All in all, China is not likely to help us out of recession.
    Instead, it's more likely that China will simply end up owning the best bits of Britain, as we're forced to sell the family silver in order to put food on the table....

    Exports from the USA have just fallen by 30%, which doesn't suggest the US is benefiting much from China's "optimistic economy".

    Time will tell.

  • Comment number 7.

    Its a pitty that the fat cat meaowsatan symbol of the devil is still on the Chinese currency ,once it goes the Chinese can build a reserve currency.

    China is decoupling without any fanfare, whilst the western taxipayerrs may have to bend over and think of communism and windows full of plastic foodstuffs where no product is available for purchase.

  • Comment number 8.

    re #6 Mr Tweedy
    My daughter is currently working in Beijing for a British firm which is giving technical expertise to the Chinese with regard to reducing CO2 emissions from coal-fired power stations. This is what we in Britain can sell ie knowledge, technical expertise and experience. This is definitely a win-win scenario and the Chinese are serious about mitigating the effects of their industrial development. Don't forget that the Chinese are trying to do in a very short time frame what we in the west have done over two centuries or more.

    From what we see of China the population is disciplined about saving rather than spending which is how our popualtion behaved in our grandparents generation;when there is no welfare state people have to rely on themselves. Good for them I say. Perhaps we could re-learn this lesson and not be so greedy for material goods as we have been. There is still a massive disparity in China between the largely rural peasant population and the mainly younger people living in the cities and if I were in the position of the Chinese government I would be looking to spend on basic state welfare provision and stimulating an internal market for goods and services. China is such a massive country it could easiy survive without the rest of the world and be self-sufficient in food, energy manufactured goods etc. We have created our own problems in the west and maybe the Chinese could help us out but they don't really need to and we'd do well to remember that.

  • Comment number 9.

    This just emphasises what an irrelevant backwater the UK has become thanks to our over-reliance on Financial "Services" (yeah, right!). It won't be long before Europe and the Americas follow us into economic dotage.

    China and India WILL rule the planet by one means or another. At least there's a chance that as English speakers we may be useful as extras in the historic town and country tableau enacted for our wealthy Asian expatriate residnets and visitors.

    Leveraging the past will probably be our last domestic industry.

  • Comment number 10.

    We can just hope that China will invest more of its wealth to get its own people out of poverty. Not as before lending money to other countries to start another boom and bust before this one has been properly deflated.

    The suffering caused by overlending in the past has a long way to run so I would think most people are horrified at the thought it might start again so soon.

    China must realise that to compete with the rest of the world there must be a level playing field. It has to raise the standards of its own people first. That means inward rather than outward investment.

    The imbalances in the world economy need to be shifted back to balance and we should never go back to the bad old ways of borrowing to waste.

    The fact that China is now making so much profit on its lending without even having to produce anything is a frightening enough factor for the rest of the world.

    It could only be a banker of course who could get so excited about such a prospect.

  • Comment number 11.

    Less than thirty years ago we were told that Japan would soon rule the world. By 1991 their economy had nose-dived in a preview of the situation we now face here. Certainly there will be rich pickings for the likes of Goldman Sachs in China but the Chineses are not going to be housing or feeding us or doing anything of material significance for people living here. Even in the realm of manufacturing, they really only offer cheap. Who would Chinese engineering or design over European except on grounds of cost?

    What we need to be questioning is whether or not we wish to send our money to China via government bonds and bank borrowing or whether we should be focussing on developing a better way of life for ourselves. Lauding a corrupt dictatorship that keeps the overwhelmming majority of its population in subservient poverty is not the way forward for us.

  • Comment number 12.

    janchild (#8) "My daughter is currently working in Beijing for a British firm which is giving technical expertise to the Chinese with regard to reducing CO2 emissions from coal-fired power stations. This is what we in Britain can sell ie knowledge, technical expertise and experience."

    Please try to take this on board: (it was said not too long ago by Dyson too). China has a higher mean IQ than the UK (105 vs 100 plug those into a Gaussian distribution with SD=15). With a population of over 1,000,000,000 to our 60,000,000 the PRC churns out more good physics graduates than we send students to university in total!

    The UK also has an interllectually deteriorating population for reasons which I won't bother repeating given that I've now explained this many mnay times...

    As MrTweedy astutely asks, what's the UK got to sell to this Democratic-Centralist country which is a) more skilled than the UK, b) which has been doing all the things right which the UK has been doing wrong, and c) which, going by so many of the posts from commentators to these blogs, generally seems inclined to keep doing things wrong rather than wake up to reality and learn?

  • Comment number 13.

    Reply to Davidwhite44

    China's hospitals, schools, roads are next to 3rd world standard

    As soon I read this post, I paused for a while not because I was convinced or shocked but because of its hilarity. Please define 3rd world standard. Thanks.

    If you want to see 3rd world standards roads, hospitals, schools, look to Africa, India, Caribbean Island. They are real eye openers there for you. You are quite oblivious to the amount of money China has to pump into rural infastructure, roads every year. All those nice skyscrapers you see in Beijing and Shanghai are and were mostly funded by Chinese companies as well as foreign corporations. Even the new Beijing airport got a fair share of private companies money in there as well. The amount of subways and metros China is building every year is just simply too staggering and yes subways and metros are for ordinary people, not only that huge amount of money pump into getting better, faster trains to boost efficiency. Have you ever been to an US subway before ? I bet ya did not, go there and see how a 3r world standard subway look like for you. You know sometimes we cannot even guarantee that everyone in any particular country can be taken care off. Take the US healthcare system for example, the welfare system...etc.... It is so poorly managed.

    Airports : Not for show certainly, as the capacity of air travellers increases as well as the influx of tourists, there is a need for new aiports, you don't necessarily build it for show, you build it for tourists and travellers and consequently boost the local economy.
    Stadium : For the Olympics, certainly yes after the Games it is just standing there but it attracts huge amount of inbound tourists. Good for local economy and boosting jobs.
    Skyscrapers : For big companies and any other overseas companies wish to open offices in China, or independently funded by conglomerates who wish to have their own building.
    My friend who just returned from Chongqing, China got these things to say : pollution is there, construction is eye popping, subways are being built like no tomorrow, schools in inner cities are sprouting up as the Chinese government there is bringing in the compulsory education for all including children of migrant workers, there also seems to be a frenzy for libraries and museum construction there as well.

    All I got to say to you mate is the world is big, we all just have to open our eyes more to see it.

  • Comment number 14.

    naughty China for saving, they should have blown the lot like the UK

  • Comment number 15.


    Your daughter is therefore contributing to the UK's ongoing industrial decline.

  • Comment number 16.

    Saving is what makes an economy grow and it's partially why China has had such spectacular economic growth. Saving means lower interest rates because it:
    1) Reduces demand for credit.
    2) Increases supply of credit (if put in a bank).

    Lower interest rates mean that manufacturers have more money to borrow. This, in turn, means that manufacturers are able to buy more machinery, hire more workers, and/or buy more land/factories/etc. This increases productivity, thereby increasing economic growth.

    Even more important is that this form of credit is not inflationary. Since it is not created via the banks by fractional reserve banking and it is not created by central banks like the BOE or the Fed, it will not drive up prices. When someone else saves so that you can borrow, prices cannot rise because you refrained from purchasing $X worth of goods so that someone else could do so and eventually pay you back with interest. This prevents asset bubbles from arising, since there is no such thing as "excess liquidity" to cause them.

    All periods of high economic growth have been associated with high savings rates. Take the "Golden 50s and 60s" in America as an example. Data from the Federal Reserve Economic Data (FRED) shows that during this time period, saving was high.

    The reason the West is in such a dire economic crisis is because of overconsumption caused by artificially low interest rates. People no longer had to save to get a house or buy a car, and thus were able to spend recklessly while racking up loads of debt. Eventually, unemployment began to rise and companies became less profitable, causing a fall in asset prices and leading to the current bust.

    The solution is MORE saving, not less.

  • Comment number 17.

    Re #6 by Tweedy and #8 by Janchild

    I believe the main problem with the situation is that except for international businessmen, most people in the West only know about China in terms of Tibet, etc! While there are obvious undesirable features in the present Chinese government, it is also true that they have done a lto for their citizens. Janchild said it all --- the country is so large it can actually be an integrated economy in every way.

    It would be good if the general public in the West is given a more balanced view of China. They would then be more awake to the opportunites open for the taking. The West is not short of products, material, intellectual, and others that it can offer to that country if only it would open it's eyes more. For UK one of it's strong offerring could be education which is highly valued!

  • Comment number 18.

    If state controlled lending is expanded, is this more to do with supporting Chinese asset values rather than servicing genuine organic growth?

  • Comment number 19.

    I don't doubt that parasites such as Goldman Sachs are wetting themselves about the 'opprtunities' they see eminating from China. But why all the gloom. let China take care of itself and start concentrating on what is happening here.

    As rrwolf says what can China really offer apart from low cost. They have nothing that the West really needs or cannot produce for itself if it so wishes. This is a BIG strategic problem for China and will majorly influence how they try to use their foreign holdings.

    As the whole world is calling for a new international financial system, do not be surprised to see some form of debt offseting or even moritorium as a major attempt to kick-start world trade.

    So let China get on with its internal development. Despite the show that they put on for the Olympics, they will be the first to admit that there is still pleanty more to do to bring their infrastructure up to scratch.

    Don't be so shortsighted. If you think strategically the game is very far from won.

  • Comment number 20.

    Well I certainly don't believe what economists say these days...& this is just one more case of that. China's economy is going through the same recession/depression as the rest of us...& the one thing I feel that could knock it off it's perch fully is firstly this new swine flu pandemic H1N1, but more importantly an even worse one in the bigger happening of the avian H5N1 flu. It has been in Asia & especially China sporadically for a number of years but I think these two viruses are going to merge this year & bring not only China's but the world's fragile (on its knees economy) back down into a deeper black hole. Even if this weren't to happen China's economy wouldn't recover fully for at least 5 years. Why? Because that's how much time it's going to take the world's economy to do so...& that's not even allowing for the "Main Street" one!

  • Comment number 21.

    This whole depression thing has finally got to me.

    I'm going to follow Germany's example. They are due for negative growth. So my target for the rest of the year is going to be NEGATIVE PHYSICAL GROWTH.

  • Comment number 22.

    This article is another example of how economists don't understand how capitalism works.
    You can't see the wood for the trees because you (and the other paid economists) do not have a broad enough understanding of capitalism set within history.

    The best starting point, I would argue, is to try and understand how the economy REPRODUCES itself.

    Simple reproduction (no growth, for abstract simplicity) requires that labour is reproduced (not only new workers to replace those who retire, but the worker sustaining himself with food, shelter, etc) and means of production are reproduced (capital that is depreciated is replaced and natural resources are replaced).

    Enlarged reproduction (growth) requires increases in the labour force (or continual productivity improvements) and new capital as well as replacing depreciating capital, and ever increasing amounts of natural resources.

    I'll stop here.
    But this starting point can end up showing that today ficticious capital is huge and China's (or whoever else's) fiscal stimulus is just another vain attempt to prevent paper wealth from collapsing.

  • Comment number 23.

    The extent of sour grapes being displayed on this page by our western friends is most amusing, but ultimately counterproductive. Comment #4, in particular, is so ridiculous as to deserve no further mention. Understand that, for centuries, China stood as a leading civilisation, outpacing the rest of the world in the arts and sciences. This century will belong to China, however unpalatable that may sound to Western ears. There is a timely creed that sums up the spirit of the Chinese people, and will ensure that Chinese civilisation, already the world's longest, will prevail.
    We do not want your opium, thanks.

  • Comment number 24.

    I have also picked up indications that the Chinese see the problem. Contacts we have in Australia were astounded (and dismayed) to learn that, no, the Chinese economy is not going to splurge on raw materials and conversion into cheap manaufactures but wants to trade up to more value added goods (realises that maintaining such a large population based on low margin value added is unsutainable) and is seeking to tackle the savings imbalance by developing more social welfare programs. Expect the NHS to have a shortage of doctors and nurses very soon!
    Meanwhile unless we (UK) restructure radically Mr Tweedy #6 will be spot on & the feral estates will become gang dominated no go areas as unaffordable benefits etc. are withdrawn. Mr Cable is also telling it like it is - we need to remove large chunks of government spending in the mid-term, rather than accept piecemeal cuts (the odd aircraft carrier for example). £175bn doesn't vanish without massive pain and a changed country.

  • Comment number 25.

    No.21. foredeckdave wrote:
    "So my target for the rest of the year is going to be NEGATIVE PHYSICAL GROWTH."

    That nullifies my idea of introducing a "tummy tax" at £100 per inch on all British waistlines exceeding 34 inches.
    We need to raise extra taxes to pay for all the debt write offs.......

  • Comment number 26.

    beijing_2008: Is the truth a little hard to digest? Is this why you dismissed my post? Have you visited a Chinese hospital recently? Maybe you've forgotten how things work in your mother country.

    As for this century 'belonging' to China, please calm down on the nationalistic CCP rhetoric. We live in the 21st century, not the 19th century. We're seeing a new multipolar structure developing with a more equal footing. China has a part to play, as do the EU, US and Japan.

  • Comment number 27.

    davidwhite44: Hi, just checked your account, it looks like you are only interested in articles about China. Good for you, mate.

  • Comment number 28.

    #9 "China and India WILL rule the planet by one means or another. At least there's a chance that as English speakers we may be useful as extras in the historic town and country tableau enacted for our wealthy Asian expatriate residnets and visitors.

    Leveraging the past will probably be our last domestic industry."

    Not necessarily !! There will always be the world's oldest profession to fall back on !!

  • Comment number 29.

    #23 beijing_2008 - While I have been upbeat on the Chinese achievements over the last few decades and, of course, China's long history and civilisation, I try very hard not to be too overbearing with my views. It may well be true that this may be China's century but it could just as easily be India's or Russia's or Brazil's century !!

    The fact that the Western countries are suffering hardships does not automatically mean that the Chinese automatically gain from that. Perhaps if you read/re-read Sun Tzu's and his great, great grandson, Sun Pin's treatises on the military-economic conditions in China during the Warring States period, you will find many parallels that can guide you in viewing the current situation.

    And remember, the Great General of the Six Kingdoms got thoroughly hammered by the Chin armies, all romance to the contrary !! That resulted in the King of Chin becoming the First Emperor of China !!

  • Comment number 30.

    Re #23 Beijing2008 --- It seems to me you have a great deal of assumptions in reaching your conclusions on China's future. While not denying the tremendous economic advances made by the Chinese government, the total development must also include many other features which will promote a just and stable civil society. On this point as far as I can understand China has a long way to go. There were some 70,000 demonstrations in China in 2008. One questions why? Civil unrest usually means peopel feel deprived of what they perceive should be theirs. The reponse from officials is frequently some form of exercise of power. This means society in China is far from stable! When power is used and not legal recourse things cannot be satisfactory. As far as I am able to understand human history, through the millenia ordinary people have always sought the resolution of their grievances fairly. I believe that in China you are sitting on a unstable chair! As far as the West is concerned, don't forget it has indepth wealth --- especially intellectual and a much longer experience of how to engender stable societies. This is no mean feat !

  • Comment number 31.

    Very few people in this thread understand the concept of comparative advantage. China's growth is (or should be) massively welcome for us. People seem to fear that somehow we'll just become an outpost of China, dependent on them for crumbs from their table or that they will outcompete us in every market. I urge anyone to read that last link to see why a richer China will mean a richer us.

    More worrying I would contend is the loss of our skilled workers - who are seeking jobs in the middle east (for example) rather than staying within the UK. It *will* be difficult to maintain high level jobs if those with the necessary skills have left the country.

    That's why we need investment in high technology and specialist industries, as well as an ongoing program of high quality education.


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