Author: Ross Garnaut

China is in a better position to sustain growth through large-scale fiscal expansion during the current crisis than it was at an equivalent stage of the Asian financial crisis. Its current account surplus and foreign exchange reserves are incomparably larger. And the successful Keynesian response of the Asian financial crisis gives all participants in the process confidence that it can be done again. Extensive discussion of the need to expand expenditure on rural development over the past three years has established a foundation for fiscal expansion without wasting resources.

But China will need all these advantages if it is to maintain strong growth through the current crisis.

This external recession is going to be large by any standards. It may push China’s export growth near or below the zero rate of the worst period of the Asian financial crisis. Slow export growth may last for longer. Exports now represent a much larger share of the Chinese economy and so have greater leverage over the growth process. And China now has a much more important market economy, in which the normal business cycle of a market economy can exaggerate the initial impact of external shocks.

Growth will be significantly weaker than the average of the reform period over the next 18 months.

But with good policy, China can avoid a major slump, as it did a decade ago.

These are the concluding points in a paper delivered at the inauguration of the National School of Development at Peking University, a digest of which was published in the Australian Financial Review on 27 October 2008 [link paywalled].

Update: Full paper presented is Thirty years of Chinese reform and economic growth: Challenges and how it has changed world development [pdf]