G20 highlights superiority of China's economy

By John Ross
0 CommentsPrint E-mail China.org.cn, June 27, 2010
Adjust font size:

The reason China did not suffer any major investment decline is the same as the reason it has not run a significant budget deficit. China has a large state company sector, which accounts for about half the economy's investment. These companies are run in a market framework, and not subject to day to day government control.

Faced with the international financial crisis such state companies could therefore increase investment in line with the government's stimulus policies. Simultaneously China's largest banks are state owned. They therefore could be, and were, instructed to increase their lending to companies in a counter-cyclical fashion. Because of its direct grip on a large part of the economy's investment mechanism China could therefore launch a large scale stimulus package, preventing any decline in investment. This economic growth aided the private sector. Simultaneously, in a virtuous feedback loop, economic growth created tax revenues, meaning China did not have to run a significant budget deficit – China's fiscal revenue in 2009 soared by 11.9 percent, whereas the U.S., U.K. and other countries saw tax revenues collapse due to the recession.

Compare what happened in the U.S. and Europe. Here there is no significant state company sector. So when investment began to collapse the government was unable to reverse it. In the U.S. and Europe, prior to the crisis, the major banks were private and all the government could do was to plead with them not to cut lending but had no power to instruct them. Government pleas were ignored and the recession was worsened by a sharp fall in bank lending to companies. The consequence was severe recessions that led to a collapse in tax revenues producing huge budget deficits.

Faced with the fall in investment that followed from such trends all the US and European governments could do to attempt to offset it was to allow their budget deficits to expand rapidly to induce companies to invest by increasing government and personal consumption – increasing private and government consumption demand. These attempts to halt the investment fall by the indirect method of running budget deficit have been relatively ineffective, and therefore economic recovery has been extremely weak. The consequent collapse in tax revenues led to the budget deficits which have now produced moves by the European governments to sharply reduce them. While such deficits were ineffective in halting the investment decline nevertheless sharply reducing them, which will result in cutting both government and household consumer expenditure, may, as President Obama warned, lead Europe into a "double dip" recession.

It is because China's economic policies concentrated on sustaining investment that it experienced rapid economic growth with no significant budget deficit. Because the U.S. and Europe refused to directly address the question of declining investment they experienced both recession and huge budget deficits. The correct solution was pointed out a long time ago by Keynes when he said "a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment." China implemented this.

Why, therefore were the U.S. and Europe incapable of following China's successful economic policies or Keynes prescription? The answer lies in the differing economic structures of the countries. The U.S. and Europe lacked the large state owned company sector and state owned banks that made China's stimulus package possible. Because of this even if the US and Europe had wished to carry out policies to maintain investment, and therefore avoid recession, they had no effective instruments with which to achieve this. When the Chinese government therefore explained that China had achieved superior economic results faced with the financial crisis due to its superior economic structure they were therefore simply stating the literal truth.

The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/node_7080931.htm


   Previous   1   2  

Print E-mail Bookmark and Share

Go to Forum >>0 Comments

No comments.

Add your comments...

  • User Name Required
  • Your Comment
  • Racist, abusive and off-topic comments may be removed by the moderator.
Send your storiesGet more from China.org.cnMobileRSSNewsletter