As the largest economy in emerging East Asia, China has avoided the worst effects of the global downturn, growing a robust 7.1 percent in the first half of the year. This has led many to believe that the country will help ignite economic recovery across the region.
To achieve this, China's economy must continue its strong growth. And there are "good reasons" to believe it will, according to the latest study of the Asian Development Bank (ADB).
Like other emerging East Asian economies, China's exports have fallen drastically. But the country's massive fiscal stimulus package appears to have countered this external demand shock, ADB said in its latest Asia Economic Monitor, a semiannual review of emerging East Asia's growth and policy issues. The report covers China, South Korea and the ten members of the Association of Southeast Asian Nations.
China is implementing a sizable fiscal stimulus package announced in November 2008. As a result of the 2-year stimulus package worth 4 trillion yuan ($586 billion), China's fiscal deficit is expected to rise from 0.4 percent of its gross domestic product (GDP) in 2008 to 3.0 percent in 2009. This may be the highest since 1979, but remains low compared with deficits in much of the rest of emerging East Asia.
The fiscal stimulus is credited with helping China's economy maintain growth amid a collapse in exports. The 6.1 percent GDP growth in the first quarter of 2009 was the lowest since the introduction of quarterly GDP figures in the fourth quarter of 1999. But growth performance improved in the second quarter, increasing by 7.9 percent.
Along with fiscal stimulus, there has also been substantial monetary easing leading to a surge in new lending. Together, these measures suggest that robust economic growth in China will continue, at least in the short term, ADB said.
Unlike most developed countries, China has been able to get its banks to ramp up lending. In the first quarter alone, new bank lending exceeded last year's total. This is good for the economy and economic activity, so long as it stays manageable, said Lei Lei Song, economist with ADB's Office of Regional Economic Integration.
It is likely that China will recover ahead of other emerging East Asian economies, reaching its targeted growth rate of 8.0 percent, said the economist.
China can serve as a huge market for emerging East Asian exports. The share of emerging East Asia's exports to the Chinese mainland and to Hong Kong has been rising over the years. Exports to Hong Kong are frequently bound for factories in the Chinese mainland.
With most advanced economies in recession, China is one of the few large economies still growing. Recent trends show that while exports from Indonesia, Malaysia, and the Philippines among others to the United States have continued falling, those to the Chinese mainland and Hong Kong have started increasing.
However, there is a limit to what China can do by itself, said the ADB economist. During the first six months of 2009, China's total exports have dropped 21.8 percent. But imports fell faster, at 25.4 percent as a substantial portion of China's imports include intermediate goods for further processing into final exports to other countries. "As global demand for its exports fell, China's imports fell further," Song said.