China Keeps on Growing

China keeps on growing (with Ron Walker Sunday, August 22, 2010)

Over the past 30 years, China has enjoyed an annual average growth rate of 10 per cent. This is remarkable, especially when considering the fact that China has been ruled for the majority of its recent history by a communist regime. Like many of their neighbours in the East, China appears to have found the formula for economic success. In contrast, here in the Western world, we continue to struggle to achieve sustained periods of economic growth that are not followed by massive depressions, much like the one we are now experiencing.

China is the second or third largest economy in the world depending on the gauge utilized i.e. value of trade or nominal GDP. China is the largest exporter in the world. What does China do differently from the economies in the West? Despite great pressure from the US, China maintains a "weak currency" policy. A measure which is unwaveringly supported by their Central Bank and ensures that Chinese exports remain competitively priced in Europe and the United States. However, the US claims that this currency management is equivalent to a subsidy on exports. In 1995 the Chinese currency, the Yuan, was pegged at 8.22 Yuan per dollar. One decade later in 2005, the Yuan was pegged at 8.11 per dollar. Today the exchange rate is 6.7918 Yuan per US Dollar. Over this period, the United States' trade deficit with China grew from US$34 billion to US$266 billion.)

With the onset of the recession, Chinese exports to the US and to Europe have slowed significantly. In response, China created an environment that is very conducive to the establishment of new businesses and the expansion of existing industries. This was done in part by drastic interest rate reductions and increased export subsidies. As a result, China has experienced an increase in domestic investment, sufficient to compensate for the reduction in exports according to the "China statistical yearbook". Despite the gargantuan size of their economy and population, China has clearly demonstrated its phenomenal flexibility by rapidly adjusting to changes in the global markets.

As the recession deepened and access to credit and liquidity for US firms tightened, China increased the amount of funds available to businesses and reduced borrowing requirements. The US bailed out banks while China bailed out businesses.

However, increased lending only helps if there is a basic level of fiscal discipline among businesses and individuals. China has one of the highest savings rates in the world with an aggregate propensity to save exceeding 50 per cent. Western civilization has developed a culture of borrowing to purchase what it cannot afford. In contrast, the Chinese save primarily to purchase their goods and services and to pay for their vacations. During the recession, the Chinese Government used its savings to stimulate the local

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