China: Global Crisis Avoided, Robust Economic Growth Sustained
2009. However, a significant portion of this investment (bank loans jumped to Y 7.4 trillion at the end of 2009 from Y 1.7 trillion at the end of 2007) was financed through the borrowings of urban development and investment companies used by local government (Wolfe 2010). If some of the projects financed by these loans prove unable to generate enough revenue, either the state-owned banking sector or central and local governments will have to take on the costs. While progress has been made in increasing the market’s role in determining the exchange rate of the renminbi, China’s failure to make the exchange rate regime more flexible could increase the risks of macro vulnerability. A more flexible exchange rate policy would make monetary policy more independent, allowing it to mitigate the impact of external and domestic shocks (IMF 2009). This motivation has become more important as China’s cyclical conditions have diverged from those in the United States, which is the current anchor for monetary and exchange rate policy. Finally, the Chinese authorities will have difficulty pursuing structural reforms in the face of resistance from those benefiting from current policies. For example, it may prove difficult to open up several services sectors to private sector participation or to reform the intergovernmental fiscal system to diminish fiscal inequality. In sum, successful economic rebalancing could help China sustain medium- and long-term economic growth. Its success, however, depends mainly on the pace and sequence of domestic policies aimed at deriving more growth from consumption and less from investment and exports. Bringing about this change will have global implications. If it is achieved, and if it is combined with the successful rebalancing efforts of other countries, it will help reduce global current account imbalances and lead to a healthier pattern of global growth. For China, however, the more successful the rebalancing effort, the more sustainable will be its future growth path.
Summary and Concluding Remarks Since the late 1970s, China has experienced impressive GDP growth, averaging 8.9 percent per year during 1995–2001. GDP growth accelerated even further during 2002–07, to an annual average of 11 percent.
193