Today’s financial crisis is a stark reminder of how deeply interdependent the welfare of nations now is. The U.S. subprime mortgage and global credit crises are reverberating around the world, and many developing economies that were initially expected to weather the storm are showing significant signs of stress—raising the prospect of a world recession. That’s why China’s announcement earlier this week that it plans to spend 4 trillion yuan ($586 billion) on domestic investments—on the eve of a key meeting of the Group of 20 nations in Washington this weekend—is so important.
All eyes are now watching China. It’s the world’s most dynamic emerging economy, the world’s largest holder of foreign exchange reserves (approximately $2 trillion), the second-largest holder of U.S. Treasuries after Japan ($491 billion as of March 2008), and the largest contributor to the U.S. trade deficit. Managing the health of China’s economy is as vital to blunting the impact of the global downward economic spiral as it is to maintaining popular support for President Hu Jintao’s government and to safeguarding the livelihoods of its 1.3 billion people.
The global slowdown is already evident on the ground in China, with 67,000 small and medium-sized businesses in the country closing their doors in the first half of 2008—many in the manufacturing sectors—and new construction collapsing to its worst level in a decade. After several years of robust expansion, the growth rate in China is expected to decline by approximately two percentage points to 8 percent in 2009. At that rate of growth, China will be unable to absorb all the people flooding to its cities from the countryside in search of work, which in turn could lead to social unrest in a country already suffering from rapidly rising domestic discontent.
That’s just one reason why there is “A Global Imperative” (the title of the Center’s recent report on future Sino-U.S. relations) for China, the United States, and other world economic leaders to work together to stave off a global recession. China’s $586 billion domestic stimulus package is a response to slowing growth, rising unemployment, and declining exports, but its importance to the world economy rests in the new funding it will provide for domestic housing, infrastructure, and post-earthquake reconstruction projects, along with agriculture, health care, and social welfare as well as tax deductions for capital spending by companies, over the next two years.
Ultimately, a broad and sustainable middle class in China will provide an additional market for U.S. goods and services and will promote improvements in American living standards—in what the Center calls a “virtuous circle” of strengthening global living standards. Indeed, U.S. Treasury Undersecretary for International Affairs David McCormick has called China’s announcement a “welcome step.”
For years, Washington has been pressing China to move away from export-led growth toward greater reliance on its own domestic economy to relieve the overleveraged U.S. consumer as the major engine of world growth. While China has been moving in that direction for some time, it took a global financial crisis to force a dramatic rebalancing move because it is now clear that Americans are not going to be the aggressive consumers they have been in the past. The U.S. Congress will likely enact a much smaller economic stimulus package of its own later this month—a welcome move, we believe—as an added measure to the $700 billion financial rescue package already in train.
Still, a little perspective on China’s spending commitment is in order. Although generally praised, some experts have raised serious questions about the size, effectiveness, and feasibility of China’s announced plan. For one, the size of the stimulus package may be considerably smaller than it appears. Of the proposed 4 trillion yuan, only 2.4 trillion yuan is actually new spending. The rest is made up of various budget items that were already announced earlier this year, such as funding for reconstruction after the Sichuan earthquake, investments in rural infrastructure, and technological innovation. Beijing also stated that it will spread the stimulus over the course of two years, rather than one year, further reducing the size of the stimulus at this juncture.
Then, there is the matter of how. The State Council announced that of the proposed 400 billion yuan to be spent this year, the central government would spend only 100 billion yuan. It would leave the remaining funding to local governments and unspecified “social investment,” which some analysts speculate refers to the multiplier effect of the central government’s initial expenditure. The question remains whether the multiplier effect was included in the government’s larger stimulus figure.
It is in Beijing’s interest, however, to make its package appear as large as possible because it is genuinely concerned about the risk of further contagion, and announcing this substantial stimulus package (even if it is smaller than it appears) should help revive consumer and investor confidence. The timing of the announcement is of course significant for another reason. According to The Wall Street Journal, “most observers hadn’t expected [Chinese] leaders to reach final consensus on a stimulus plan until an annual economic policy meeting scheduled for the end of this month,” but the announcement comes just before a summit of the Group of 20 in Washington this coming weekend.
The summit will bring together leaders of the 20 largest economies around the world to discuss stabilization of the financial crisis and the need for a fiscal stimulus to re-fire the engine of global economic growth. China is now poised to be a significant player in those discussions. And that is fitting, because a key challenge facing the incoming Obama administration will be getting the world’s other big powers to step up to the plate to help address pressing world problems.
While the new administration seems inclined to pursue a strategy of collaboration rather than confrontation, getting China (and Russia, India, and other rapidly industrializing nations) to pay for the privilege of greater influence in the world by offering funds and concrete help to address issues such as climate change, non-proliferation, and the financial crisis will be an ongoing, complex and difficult process.
So when China acts the part of a responsible economic leader by putting real money on the table (even if it is not as much as advertised), it earns the right to act alongside other major economic powers of the world. The outgoing and incoming U.S. administrations should make that point clear during this week’s Group of 20 meeting.
Nina Hachigian is Senior Vice President and Director of the California office at the Center for American Progress. Sabina Dewan is Associate Director of International Economic Policy at the Center, and Winny Chen is a Research Associate for National Security and International Policy at the Center.
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