China's Slow Growth Challenge
DEVELOPMENTS
China has not been immune to the global economic downturn, but an influential report by the World Economic Forum now proclaims that China’s economic downturn may pose one of the biggest threats to the crippled world economy. China now boasts the third largest economy in the world but is suddenly suffering from its lowest economic growth rates after five straight years of heated economic growth. Its leaders worry that the sudden economic downturn may undermine their political legitimacy, which has hinged on China’s extraordinary economic growth. Rising unemployment in the millions is stoking some of the greatest social unrest the country has seen since the Tiananmen protests in 1989. In 2009, the Chinese government will focus on fixing its economy by stimulating domestic demand and growth, while ensuring employment to keep up with its growing population and maintain political stability.
Social unrest resulting from mass unemployment poses a significant challenge for China’s leadership in 2009; top economic planner Zhang Ping has already said that "excessive bankruptcies and production cuts will lead to massive unemployment and stir social unrest." Another researcher has also warned of “mass-scale social turmoil,” with the sobering forecast that China’s unemployment could be as high as 14 percent by next year. Both President Hu Jintao and Communist Party’s Security Commissioner Zhou Yongkang have already issued warnings that protests must be contained. The riots and protests which are mainly confined to China’s coastal export-dependent regions, may move inland as the economic damage starts to spread to other sectors.
Light manufactures, for which China is known, such as small toys, shoes and electronics, have been especially hard hit, and the sudden shutdown of these factories has resulted in about 10 million jobs lost, primarily among migrant workers.
As bleak as China’s 2009 forecast looks now, experts remind us that China has yet to feel the full effects of the global economic meltdown. According to World Bank estimates, China's growth will drop further to 7.5 percent in 2009; the country has not seen a rate this low since 1990. But, one researcher of the World Economic Forum report has predicted an even “hard[er] landing” for China, estimating that economic growth could plummet to 6 percent. In December 2008, the World Bank reported in its China Quarterly Update that the impact of the global economic crisis on China's economy has been "manageable so far, but is expected to intensify."
BACKGROUND
When China's economic growth wound down to a five-year-low of 9 percent in the third quarter of 2008, the government immediately announced a 586 billion dollar stimulus package to stimulate the domestic economy and restore confidence. The package targeted ten areas of investment that focus mainly on building infrastructure and providing social welfare to encourage Chinese consumers and companies to spend more, thereby increasing domestic growth and demand. Some economists, however, point out that infrastructure building takes time to pay off, and an effective stimulus plan will have to address the immediate social consequences of the downturn, such as the millions of layoffs which have resulted in rising incidences of mass protests – especially in the southern region, where thousands of export firms have been shutting down.
The government will also be focused on stabilizing its exports sector as quickly as possible. According to government numbers, exports account for up to 40 percent of China’s gross domestic product, and China’s economy has been devastated as the export sector has been battered by weakening global demand and rising costs. In December, China’s exports were down for the second month in a row. By contrast, just one year ago, China’s export machine appeared unstoppable, growing 20 to 30 percent. HSBC economist Ma Xiaoping has predicted that China’s exports will be down as much as 20 percent in the next several months.
ANALYSIS
The global financial crisis is the first major blow to China’s miraculous economic growth and poses a significant governance challenge for its leadership. The government will have to act quickly to quell protests and address mass unemployment, while taking measures that will help China’s long-term economic goals. China hopes that its stimulus package will boost growth rates to 8 percent (the point at which the country can maintain sufficient employment for its population), but reports by the World Bank and World Economic Forum suggest that this may be unlikely. China is a global producer, a creditor to other nations, and the biggest market in the world; it is important for China to maintain stable economic growth, not only for itself, but to help stabilize the world economy.