China Economy Plan Meets Political Needs

China's $586-billion stimulus plan serves economic and political needs, experts say.
By Michael Lelyveld
2008-11-19
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BOSTON--China is committing enormous resources to avert serious job losses and social unrest, economists say.

On Nov. 9, the State Council announced a huge 4-trillion- yuan ($586-billion) stimulus plan with commitments to spend the funds in 10 sectors over the next two years.

The investment in areas such as housing, roads, and earthquake reconstruction is aimed at stemming a slide in the country's growth as recession threatens economies worldwide.

But unlike Western economies, China is still recording high rates of growth, even though its gross domestic product is rising more slowly than the double-digit pace of the past five years.

According to revised International Monetary Fund estimates in November, China's GDP grew by annual rates ranging between 10 and 11.9 percent from 2003 through 2007.

Growth will slip to 9.7 percent this year and 8.5 percent in 2009, the IMF said. Although China's expansion may be slowing, it still far exceeds worldwide growth rates of 3.75 percent and 2 percent forecast for this and next year.

By most economic measures, China is still doing well without the stimulus package. Recent reports from the National Bureau of Statistics show retail sales climbing at an annual 22-percent rate in October. Foreign direct investment jumped 35 percent in the first 10 months of the year. Exports are up nearly 22 percent in the same period.

Such growth rates would be the envy of the many countries that have been battered by the current economic crisis. But each of the figures represents a progressive slowing of growth rates that China enjoyed last year.

Toll on workers

Many export-related factories in coastal cities have closed as foreign demand weakens. The troubles have taken a heavy toll on workers in once-booming manufacturing centers like Dongguan in the southern coastal province of Guangdong.

The apparent contradiction of layoffs during a period of relatively high growth raises the question of why China needs such tremendous GDP rates.

In a Radio Free Asia interview, Harvard University economics professor Dwight Perkins said the answer is China's ever-expanding workforce. Although 9-percent growth is still substantial, the government becomes concerned whenever GDP rates start to trend down.

"The problems begin to appear when they get down to 5 or 6 percent, mainly because they have the need to provide a lot of new employment both to the people entering the workforce -- about 10 or 12 million a year -- and to people moving in from the countryside," Perkins said.

"The argument is made that they need higher than 5 or 6 percent to create enough jobs to keep from having political tension," he said.

Perkins said that even if China's economy grows at only 5 or 6 percent for two years, the country would muddle through, but prolonged growth at that rate for a longer period would risk social tensions.

Double-digit growth rates have brought their own risks, including higher energy and food costs, power shortages, and unchecked pollution.

Slower growth

At least some of the layoffs have been due to higher costs and wage growth during the expansion, said Perkins. The labor situation has been worsened by the sudden falloff in global demand, but China may have been headed for a slowdown in any case.

"Personally, I think the 10, 11, or 12-percent rates are probably too high to sustain," said Perkins. "No other country has been able to sustain 11 and 12-percent growth rates for more than a year or two."

"I would think that going back to 9 percent would be doing well. The Chinese themselves, when they were growing at 11 or 12 percent, were trying to cool it off," he said. In the third quarter of this year, China recorded 9-percent growth, marking the slowest quarterly rate since the SARS outbreak in 2003.

Princeton University economist Gregory Chow agreed that the Chinese government is concerned about the trend toward slower growth rather than the moderate decline.

"A significant decline in the rate of growth is a problem," Chow said. "This 9 percent is only the last quarter. They expect that the next half-year, things may slow down more."

Gary Jefferson, an international trade and finance professor at Brandeis University, said China needs high growth rates for both employment and political reasons, suggesting that the government may resort to stimulus whenever job losses rise.

Economy in transition

"It still is very much an economy in transition," Jefferson said, citing its shift from central planning, heavy industry, and agriculture. "High growth very much serves as a lubricant that allows for the creation of new jobs so that people in low-wage and low-productivity jobs are able to move out of those more traditional sectors."

But the government must also err on the side of high growth rates in order to maintain political stability, he said.

"The political leadership, and more specifically the Chinese Communist Party, does not enjoy the electoral legitimacy that the president and the Congress in this country and the leaderships of other OECD countries enjoy," said Jefferson. "So, it makes it more difficult to endure substantial economic slowdowns or recessions."

Jefferson said the government feels compelled to deliver the benefits of economic expansion. "The legitimacy of the Chinese Communist Party depends very much on performance legitimacy," he said.

That means "a high rate of growth and the ability to meet the expectations of the Chinese public, in particular the emerging urban middle class, to meet rising living standards," Jefferson said.

CH. 1: MANDARIN | CANTONESE

CH. 2: VIETNAMESE | BURMESE | KOREAN

CH. 3: KHMER | LAO | UYGHUR

CH. 4: TIBETAN

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