China's "Bamboo Shoot"ing Recovery

Summary
Even in this global recession, many economists now believe that China’s massive fiscal stimulus will indeed help China to achieve its growth target of 8% in 2009. After being stagnant in the 4th quarter of 2008, China’s GDP has risen an estimated annualized rate of 6%. The economy looks to be recovering as various sectors are performing well. Industrial production is up 8.3% from a previous 3.8% two months ago. Retail sales are 16% higher than a year ago, while fixed investments have increased 30%. Although this is indicative of government infrastructure-led stimulus working, exports are still considerably down and the demand is forecasted to remain weak. With one of the biggest fiscal stimulus in the world and the ability to force state-owned firms to spend and state banks to lend, China’s efforts to reverse the current economic trend are being employed quicker than anywhere else. JPMorgan believes that this credit and investment boom could help China’s growth to an annualized 10% in the remaining three quarters of 2009. Jonathan Anderson, an economist at UBS, explained how the property market is already rebounding after falling sharply and is up 36% year-to-date, a key factor as more houses sold will result in more construction done. If infrastructure spending continues to rise and construction continues to quickly recover, China could see its GDP grow by 8% at the end of the year, even if exports remain weak. Despite the good forecast, there are others who are concerned over government-influenced spending accounting for ¾ of China’s GDP growth because it may potentially lead to overcapacity, low rates of return, and potential bad loans for banks.

Connection
This article is primarily concerned with discretionary fiscal policy as China alters its government spending in order to improve economic conditions. As there is a need to combat the recession and level of unemployment, China had to go through a lengthy process to determine the appropriate combination of government spending. However, the greatest connection, or perhaps lack thereof, is the issue of time lag. The textbook clearly states there is a recognition lag, time before evidence of a problem becomes apparent, and decision lag, time it takes for a decision to be made, passed in government and implemented. However, China’s response to the global economic downturn shows no signs of the adverse effect of time lag. As its economy began to slow in 2007, well before America’s exports stumbled, China recognized its problem immediately and already began to prepare for the economic downturn that hit recently. Also, China does not waste any time as their fiscal stimulus was prepared, passed in government and implemented rather quickly. This decision lag is clearly a non-factor in China’s fight against the recession. They have recognized that the fall in domestic demand is leading its economy down and also that by raising it, it can reverse the circumstances and help China’s economy rise again. The fact that China is run under a single-party system means that political consideration is not a factor either in determining fiscal stimulus. China’s single-party communist state allows the country to skip the time lag and go straight to reversing the economic slowdown.

Reflection
I can honestly say that I am thoroughly impressed with China’s ability to eliminate the time lag. Although I do not have full knowledge of the process they went through to pass the massive fiscal stimulus, it is evident to me that they did it in quick and efficient fashion. Conversely, as many people have criticized Canada’s actions against the current economic crisis and our Prime Minister Stephen Harper’s decisions on what to do about our country’s circumstances, the general idea I have gained is that there is a definite time lag that Canada faces when making a big financial decision. The political difference between China and Canada are clear, China is a single-party communist state and Canada is a multi-party democratic country. Perhaps this is the biggest issue when discussing the decision lag as China passed its fiscal stimulus with relative ease, while Canada had to go through an incredibly lengthy process to pass it as law. Furthermore, it is likely that political considerations came into play when developing the fiscal stimulus. There is no doubt the reigning Conservative party considered its status and perception in future upcoming elections. While I am not asking Canada to become a communist state, it would be in the country’s best interest that all parties work more closely, instead of defying each other, to lift Canada from its recession. Canada can learn quite a bit from China if they begin to work faster in similar situations. After all, time is money.

http://www.economist.com/finance/displayStory.cfm?story_id=13496444&source=features_box2