China's ability to put policy tools to work, quickly and decisively, has become overwhelmingly clear over the past two years, evidenced by its use of fiscal stimulus to avert the worst of the global downturn. Now it's time to cool off.
Speaking at the Asian Financial Forum in Hong Kong yesterday, Nouriel Roubini, economics professor at NYU's Stern School of Business and the founder of RGE Monitor, said China has done a good job using its "policy arsenal" to stimulate the economy and that the central bank's recent tightening measures -- a slight increase of borrowing costs in the interbank market and an increase of the reserve requirement for banks -- were "necessary" to stop the economy from overheating.
"The strategy of China that worked for a year or two is going to lead to even more of a glut of capacity when there is already a massive amount of capacity," he said, referring to Beijing's moves to push domestic banks and state-owned enterprises to expand beyond their needs. He urged China's policymakers to continue to make the necessary decisions, despite the short-term pains, to roll back their pump-priming tactics.
By most accounts, China's strategy over the past 18 months has been well planned and well executed. In November 2008, the government announced a $585 billion stimulus package of which 80% went into veritable "shovel-ready" infrastructure. The country's economy has responded in kind, growing 10.7% in the fourth quarter and 8.7% in 2009 as a whole -- ahead of Beijing's 8% goal.
In contrast, of the $787 billion stimulus package that the US enacted in February 2009, only 33%, or $257.2 billion, had been spent as of January 10, according to the US Treasury. Unemployment is still rising and the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters predicts the economy shrank 2.5% in 2009.
China, along with its Asian and emerging market neighbours, looks set for a "V" shaped recovery according to Roubini. "The good news, the growth is certainly more robust in Asia but also in Hong Kong, China and throughout emerging markets," he said. And he, one would hope, should be able to foresee the shape of the recovery.
Famous for his accurate prediction of the collapse of the housing bubble in the US and the serious consequences it would have on the financial industry, Roubini earned the nickname "Dr Doom" at the height of the crisis in 2008. On the whole though, he was as bullish on China as a known pessimist could be.
"China can help itself, it can help emerging Asia, it can help commodities exporters, but it cannot be the only engine of global economic growth," said Roubini. He cited the fact that 1.3 billion Chinese consumers only spend $1 billion annually, while 300 million American consumers spend $10 billion.
In fact, without the recovery picking up in the US, Europe and, to a lesser extent, Japan, the global economy will continue to suffer. "When the over-spending countries spend less and the over-saving countries do not reduce their savings rate to compensate for the fall in spending, then globally there is a glut of capacity and global output remains weaker than otherwise and the global recovery would be slower than otherwise," said Roubini. He defined China as an over-saving country and the US as an over-spending country.
Roubini recommended China look at creating a social safety net, including national pension and healthcare plans, to encourage greater consumption.
The US will have a "U" shaped recovery he said with unemployment remaining high, consumption low and a lack of private sector involvement until the bank sector is completely back on its feet.
But on the whole, eternal pessimist Dr Doom was relatively upbeat. He began his talk giving credit to global policymakers for doing the "right thing" in terms of getting the world out of economic freefall with their record levels of fiscal stimulus.
"There is good news," he said. "There is light at the end of the tunnel."
But if there was one thing that rang clear from his talk, it's that the world's economies -- whether the US, China or Burkina Faso -- are not out of the woods yet.