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The seasonable pace of economic recovery

By Zhu Qiwen (China Daily)
Updated: 2009-06-22 07:49

While talk of green shoots is just gaining currency around the world, the Chinese economy has seemingly been advancing well with the change of seasons.

Yesterday, the longest day of the year officially marked the start of summer. Thus goes China's economy into a new phase of recovery.

With latest economic data giving more cause for optimism, Premier Wen Jiabao said last Wednesday that the economy is at a critical moment as it begins to recover "steadily".

Last week, the World Bank also raised its forecast for the world's third-largest economy from a 6.5-percent increase in GDP growth this year in its previous report in March to 7.2 percent.

Though still below China's official growth target, the World Bank's upward adjustment shows that the Chinese government's determination to achieve a GDP growth of 8 percent this year has become more credible than ever. Most outside observers once believed it to be mission impossible amid the worst global recession in many decades.

Take a glance at China's economic data. Since the Chinese economy fell into the coldest winter in more than a decade at the last quarter of 2008, it has ostensibly bottomed out in the first quarter of this year and is rebounding now more strongly than expected on the back of a US$586-billion government stimulus package and unprecedented credit support.

In fact, until very recently, the country's continuous economic improvement was widely deemed as a "little spring" that could turn out to be a warm spell during a long and cold winter.

All of a sudden, the economy was found to have sailed into the season of sunshine. Chinese policymakers recognized that economic performance had started to show positive changes, favorable factors were increasing, the overall situation had stabilized and was moving upwards.

As a result, optimism has apparently prevailed that a V-shaped recovery is taking place in this country.

Tempting as it is, however, the argument for a steep and sustained recovery must not be taken for granted. High expectation can indeed help boost confidence in confronting the global economic crisis, but it does not allow room for complacency in policy making. Given the uncertainties at home and abroad, the actual pace of China's economic recovery will remain a subject of debate rather than a sure bet.

A key assumption that the country can maintain the momentum of recovery is that massive fixed-asset investment funded by record bank loans can continue to boost economic growth without inviting significant inflation to return.

As long as the country's consumer and producer inflation stay negative, policymakers can comfortably rule out immediate inflationary risks in spite of the surge in international oil and key commodities prices.

Slow economic recovery may not be a matter of concern, but there are questions Chinese policymakers have to answer.

One is the impact of infrastructure-led investment boom on structural economic change. The country has been forced to cut dependence on export for growth. If intensive investment is sought as a replacement engine, domestic consumption is unlikely to assume its due and desirable role in fueling balanced economic growth.

The other problem is the danger of too much liquidity.

Though record credit growth has not sparked inflation in the traditional sense, a bitter lesson from the financial crisis is that central banks can no longer fix their attention on consumer prices and ignore asset prices.

These challenges mean that there is no easy way out. Policymakers need to prepare for short-term pain to reap long-term gain with more focus on boosting consumption.

Less investment growth may slow the recovery, but it is only natural to have a cool period after a hot summer. A change in growth pattern will eventually decide the pace of recovery.