March 10, 2011

A Double Dip Recession: How Would China Respond? (Guest Post)

By Dr. Tim Summers

The Irish bailout and nervousness over other parts of Europe's economies again raises the question of whether we might see some sort of double dip recession, or even another global financial and economic crisis. Although this still remains hypothetical, it is worth thinking about how the Chinese authorities might respond were the global economy to collapse again.

As time goes on, this question becomes more relevant, not so much due to the aggregate size of the Chinese economy, but because it remains one of the fastest growing parts of the global economy. Back in 2008, the Chinese authorities' stimulus package did not just prevent a possible crisis in the PRC. China's GDP increase of 8.7% was a bright spot in global growth that helped save the world economy from an even worse fate.

Memories are strange things, and Chinese policymakers probably think of their actions then as a sign of responsible assistance to the global economy. It seemed that way in the west too, at the time, though any gratitude has since given way to condemnation of China's stability-focused approach to its exchange rate, and nervousness that China has gained just slightly too much economic clout over recent years.

All of this would be very relevant were we to witness another global downturn. From a Chinese perspective, I suggest there would be two main angles.

The first is the impact of any subsequent downturn on the Chinese economy itself. The 2007/8 shock was all the greater to China for the fact that it came after a major global boom during which Chinese GDP ballooned, but which also saw the country's exposure to global trade rise substantially (total trade reaching 67% of GDP in 2007).

China would clearly suffer again, though the next time could be rather different. The authorities have already tweaked policy to reduce the impact of an export shock, focused more on indigenous innovation and domestically-driven growth, and witnessed the organic drift inland of GDP growth to provinces less exposed to the global economy, particularly noticeable since 2007. The domestic incentives for Beijing to put together a second major stimulus to deal with any future global slowdown could therefore be lower.

Such a stimulus would also look unattractive because China is currently grappling with the consequences of the first stimulus package, particularly rising inflation, but also delays to its achievement of energy efficiency targets. The leadership will not want to enact measures which will exacerbate these fractures further.

Secondly, this needs to be put alongside the tense international environment over China's currency management - though in Asia views that it is continued US profligacy which is to blame probably have more traction. These tensions would make entreaties to China to boost the global economy out of another crisis politically more difficult; to turn this around, perhaps it would mean that any such boost might have to be more on China's terms than those of the west.

© Copyright 2010 The Foreign Policy Center, reprint or republish only in its entirety with proper author credit and linkback.

About the Author: Dr. Tim Summers is based in Hong Kong, where he does research and consultancy on China. He was formerly British Consul-General in Chongqing, southwest China, and is a Research Associate with The Foreign Policy Centre, a UK-based foreign affairs think tank.

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters

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