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Over time the financial crisis struck the whole global economy. Consuming developed countries decreased demand and consequently minor problems started to be an issue for the economies that weren’t primarily concerned with the crisis. This is what happened to China – the factory of the world. Its exports driven boom was suddenly halted by the slump in global demand and by the end of 2008 about 20 million people had lost their jobs and 70,000 businesses closed down. Is it likely that China will return to its 10% growth path? Most likely yes, but Beijing needs to completely review its growth strategy to avoid this happening again.

In the past eight years exports, investments and consumption contributed to about a third of the GDP growth annually each. Exports in July fell 19% year on year in what was a ninth successive monthly decline. The government had to figure out a rescue plan which would secure the minimum 7% GDP growth needed for 2009. Growth below this figure could have resulted in serious social unrest as the Chinese economy has to absorb the ever increasing workforce migrating from the inland provinces. According to recent statistics some 150 million workers were employed outside of their home town and it is likely to increase over the coming years. In this ‘tour de force’ Beijing’s plan is to replace the diminishing world demand with stimulated domestic consumption. At the end of 2008 the CCP launched a 4 trillion Yuan (about 400 billion Euros) stimulus plan. Over a period of two years the funds will finance programs in 10 major areas, such as low-income housing or rural infrastructure. Federal spending will at least partially replace losses in lesser exports income.

The second major problem in the Chinese economy is deflation – mostly due to break down in foreign exchange. To increase the competitiveness producers slashed their prices at an average of 7% compared to 2008. Mild deflation is likely to continue throughout this year and the consumer price index (CPI) is now projected to decline by 0.5%. To stimulate the economy and halt this nightmare the People’s Bank of China has launched an expansionary monetary policy by expending credit supply via lower bank reserve requirements and cutting base lending rates. Beijing clearly hopes this will result in greater credit expansion and greater consumption. Recently, China has been testing international demand for its currency by selling Yuan-denominated bonds for the first time. The demand for the US Dollar is declining and Chinese RMB wants to fill the resulting gap – which implies great seigniorage profits.

China’s fiscal and monetary policies are supposed to get the economy back on track for growth. Forecasts for 2010 are as follows: 8.9% GDP growth and 3% inflation. Even though exports will be on a rise the recovering world economy will not be able to absorb China’s output. Beijing will therefore focus on increasing domestic consumption and modernizing its industry and infrastructure to become less reliant on the outside world. This should result in a completely new Chinese growth stimulus acquiring similarities to the stimuli of developed countries, in particular to thier technological advance. Export growth could never have lasted forever and the global financial crisis only hastened the inevitable change.

The CCP is divided on its economic development and geographic appropriation. Coastal provinces that up to now supplied the engine for China’s economic miracle will soon be the first to experience the decline of the catch-up effect. The rescue plan is hidden in the development of the countryside that the CCP is attempting to turn into a new promised-land through the injection of federal money and promising fiscal reliefs for new businesses.

China will most likely recover from the crisis by retracting in on itself and looking for new stimuli domestically but this success could be short lived. In the short-term China’s growth should once again reach 9% annually but in the long-term the catch-up effect will fade. For how long is the rise sustainable? This question will remain unanswered. However, to leave the reader with increasing doubt let me quote Premier Wen Jiabao from a 2007 press conference:

"The biggest problem with China's economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable."

Marcin Szwajkajzer is an intern in the Asia Pacific Department of the Polish Ministry of Foreign Affairs. He is currently conducting research for his masters thesis concerning Sino-African relations at the Warsaw School of Economics, Poland.

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