China's Role in the Origins of and Response to the Global Recession
Transcript of testimony at the hearing before the US-China Economic and Security Review Commission
I would like to thank the commissioners for inviting me to participate in this hearing today. I would like to focus my remarks on the actions that China is taking in response to the global downturn and to give an assessment of their likely effects.
The key point I would emphasize is that China is the gold standard in terms of its response to the global economic crisis. If you look at the magnitude of what they are doing in several domains, it is very substantial, and among the economies that matter, at least according to the International Monetary Fund (IMF), China's stimulus program relative to the size of its economy is larger than that of any other country including the United States, and I think they may have underestimated what China is doing.
I would highlight three aspects of what they have announced so far, and I will start with monetary easing, since China announced that in September last year. It was one of the first steps that they took, eliminating lending quotas, reducing interest rates, and a number of other steps.
Unlike in the United States where banks for the most part have not been willing to lend, we have seen over the last three months a very substantial increase in Chinese lending to corporates and to households. So the financial sector in China is responding very well so far to the slowdown in global economic growth.
China is the gold standard in terms of its response to the global economic crisis.
The second component that I would highlight, and I think this is better known, is the infrastructure investment program that China rolled out in November. We can argue about some of the details, but I think this is going to amount to a stimulus in the neighborhood of two to three percentage points of GDP. It seems very well focused on areas where returns should be high, and I do not think China is going to have the problem of Japan a decade ago of building bridges to nowhere.
The third component which I think has been less widely noted or analyzed is that China has very substantially stepped up its social programs and its transfer payment programs. The social programs are extremely important because they do contribute, I believe they will contribute to rebalancing the economy, will reduce the precautionary demand for savings, and lead households to spend a larger share of their disposable income.
I think the most notable example in this regard is the commitment that China has now made to expand health insurance coverage to include an additional 400 million Chinese, which will give them near universal coverage by 2011. This will mean that the share of total health care expenditures in China paid for by the government is going to more than triple over the next three years. The share paid by households on an out-of-pocket basis will decline very dramatically.
On the transfer payment side, China has done quite a bit. They have some transfer of payment programs for 75 million low-income people. Those people are getting much, much more money this year than they have in previous years, and China has also substantially increased pension payments to pensioners. The increases are several times the rate of inflation.
In all three areas, I think China has done extremely well. The conclusion I draw from this quite frankly is that China has the prospect of bottoming earlier than any other major economy in the globe. I do not know whether it will be this quarter that it will be off the bottom or the second quarter, but I'm reasonably confident that either this quarter or the second quarter of this year, China will come up from the 6.8 percent growth recorded in the fourth quarter of last year. I say this because China does not have any toxic financial assets. It did not acquire very much from abroad, and its regulators have not allowed the introduction of complex derivative products of any kind, and the result is the central government has not had to inject capital into any financial institution, bank or otherwise, as a result of the crisis, nor have they had to guarantee the liabilities of any bank or other kind of financial institution.
Secondly, China is very underleveraged, particularly by comparison with the United States. This is a theme that I know Stephen Roach has written about for years very forcefully, and I can just summarize it in one comparison: Household debt to GDP in the United States is roughly 100 percent; household debt to GDP in China is 20 percent.
We are having a huge contraction because demand is not just slowing but actually shrinking, and consumption demand in China is not shrinking; it is still growing fairly rapidly, and households do not need to deleverage as is the case in the United States. We will have a substantial increase in our savings rate over the next few years, which means that our recovery, when it does come, will be relatively slow. Just to give you a few further points, the average loan-to-value ratio for a mortgage in China taken out by a household today is 50 percent. They do not have home equity loans. You cannot go back and refinance and take your equity out if there's been a price increase.
China is now the largest market for cars in the world, even ahead of the United States. Ninety percent of them are sold for cash. Bank lending or other kinds of lending for financing automobiles is minuscule in China. That contributes to the low household debt.
The corporate leverage has also been falling in recent years, which puts them in a relatively strong position. So, as I say, I do not think consumption demand in China is going to collapse as we've seen in the United States. It's likely to continue to grow fairly rapidly and put a floor on China's economic growth, and the lack of a need to delever means that consumption can play a more important role for reasons that I mentioned earlier.
I would say finally that China has the prospect of converging back to its long-term potential growth rate much sooner than most other countries on the globe, and in part this is because the government does not have very much debt. Debt to GDP is roughly 20 percent, slightly less, of the government, and going forward, I believe the United States and many other countries will have a very substantial medium-term fiscal sustainability issue that is going to restrict government expenditures, require increased taxes, or require higher interest rates.
I do not believe these conditions will prevail in China. Yes, China will run a budget deficit this year, but it will be relatively small and quite easily financed. So I think the prospects are that China will bottom earlier, converge back to its long-term growth potential faster, and thus make, since it's the third-largest economy on the globe, a very substantial contribution to the global recovery that we're all looking for.