While North America and Europe were hard hit, China has survived the international crisis of 2008, thanks to huge public spending, a low interest rate and consumption subsidies. China’s growth rate reached 9% in 2009 and 10.4% in 2010; in its wake, China dragged Asia and Latin America out of the crisis. It has also managed to keep unemployment at a sustainable level. China even overtook Japan in 2010 as the second economy in the world in terms of GDP and is closing the gap with the US. On the whole, the rise of China seems unaffected by the subprime crisis of 2008. However, a closer look shows that real problems lie ahead. Chinese workers no longer accept exploitation. A wave of strikes spread during the summer of 2010. Workers fought for wage increases, better working conditions and the right to organise and bargain.
Inflation, especially of food prices, has accelerated since the middle of 2010, adding a new problem for workers and a concern for the government, which fears worker discontentment.
On top of all this, the government is doing its best to prevent any contagion from the democratic revolutions in Arab countries. Although the overall situation in China is completely different, these democratic revolutions have shown Chinese workers that it is indeed possible to topple even the worst and most powerful dictatorships.
China’s response to the first stage of the recession
The impact of the crisis on China and Asia has so far been limited. Unlike European banks, Asian banks had little to do with subprime loans or toxic products. With the exception of South Korea, Asian countries did not rely on short-term capital and bank loans for financing their economies. They were not caught in a debt trap like Eastern European countries or Greece. Most of them, and China in particular, had accumulated huge amounts of currency reserves and were able to cope with the capital flights at the end of 2008. Asian countries were primarily affected by the decline in their exports because of the slump in demand in North America and Europe. As a general rule, the recessive impact has been stronger in the most open Asian countries, those whose exports and for whom the USA was an important customer. But the three largest and most populous countries in Asia – -China, India and Indonesia – have not experienced a single quarter of recession between 2008 and 2009. The resilience of these three countries – and above all of China, among the top trade partners of most Asian countries – led to a quick rebound in 2009 and a much stronger ‘V’ shape recovery than in the rest of the world.
Figure 1 here.

Several factors explain Asian countries’ resistance to the crisis and the speed of their recovery.

First, to absorb the shock of the fall in exports, Asian countries launched unprecedented rescue plans in the region (in marked contrast to the ‘Asian crisis’ of 1997–99, when IMF-sponsored structural adjustment plans worsened the crisis). The Chinese rescue plan is striking in its magnitude: US$ 585 billion, amounting to 13.3% of GDP, to be spent in two years. On average, the rescue plans announced by Asian countries amounted to 7.5% of GDP, as against 2.8% of GDP for the G7 countries.

Furthermore, Asian rescue plans were focused more on public expenditures than on tax cuts. On average, Asian countries dedicated 80% of the rescue funds to increases in public spending, as compared with 60% on average in G20 countries. The only exception is Indonesia, where tax cuts dominate.

Those public expenditures were accompanied by an expansionary monetary policy. The median interest rate of Asian central banks decreased by 2.25 points, five times more than in the previous crisis. This had a positive impact on growth.

In countries like Vietnam and China, the expansionary monetary policy played a dominant role. In China, public spending increased. But on the whole, public expenditures did not play a crucial role in absorbing the shock. It was in fact the expansion of credit that took the lead in 2009, with a spectacular increase of 31%. This too fell to -4% in 2010, when the Chinese government decided to cool down the economy because easy money was inducing a new speculative bubble.

Households’ consumption kept steady as employment did not collapse during the crisis. Workers who lose their jobs in industry try to find jobs in services, or become self-employed, or return to the family farm when possible. In China, hundreds of thousands of migrant workers went back to the interior in the winter of 2008 or stayed there after the end of the New Year celebrations in February 2009. When the economy recovered in spring 2009, many of them returned to the cities to find urban jobs, which pay more.

Defying many sombre predictions, Chinese exports did not collapse and recuperated thanks to the recovery in world trade. Given the high import content component of Chinese exports (about 50%), imports fell in the same proportion. This reveals China’s resilience to external shocks, and at the same time its weakness.

The myth of Asia decoupling from the rest of the world
China has a role as an assembly centre of components made elsewhere in Asia, mostly in Japan and South Korea and to a lesser extent in South East Asia. The final products assembled in China are mostly destined for the rest of the world, in particular Europe and North America. To be less vulnerable to a crisis originating in the USA or Europe, East and South East Asia should be able to absorb a major and growing part of their production of final products. East Asian internal trade has not yet reached a stage where it could cushion worldwide trade contraction.

Although China has become the second largest economy in the world, bypassing Japan in 2010 and catching up with the USA, China and the rest of Asia are still far from replacing the USA as the biggest market of the world. If we take into account the total Chinese population, Chinese income per capita would catch up with US income per capita somewhere between 25 to 50 years ahead, depending on the assumptions made. If we take into account only the richest regions of China, home to 42% of the Chinese population in 2005, the catch-up could occur in 10 to 20 years. The most optimistic hypothesis of the Asian Development Bank shows that at the present pace, the 22 Asian countries which form developing Asia, according to the ADB classification, should overtake OECD countries’ consumption outlays by 2030. All these predictions are far from certain.

To be able to decouple from the rest of the world, at least to a degree (there is no such thing as complete autonomy), Asia and above all China should be able to rebalance its economy away from export-led growth and in favour of the domestic market. This can only be achieved if three conditions are fulfilled.

• China must revalue its exchange rate to reduce the price of imports, and hence the cost of goods it produces for the internal market, and to make exports less profitable than they now are.
• China must significantly raise the real wages of urban and rural workers so that internal consumption can recover from its present extremely low level (35% of GDP). This is the most difficult decision because Chinese capitalists and bureaucrats are used to the huge profits that state-owned and private enterprises are making on the backs of overexploited workers.
• China must increase the interest rate from its present low level in order to discourage the very high investment in capital-intensive industry and reorient the economy toward domestic services.

Domestic services like education, health, housing, culture and leisure are needed by the vast majority of Chinese people. They are labour-intensive and could generate the millions of jobs that China needs, and they consume less energy and pollute less than industry. China has made some progress in this direction but is far from the objective.

Can China resist another recession?
In 2011, the international crisis entered a second stage. The crisis in Europe is very serious, and the situation in the USA is not much better. Today, there will be a new slump in world trade. Chinese and Asian exports will be hit again. Will China and Asia be able to resist the new trade contraction with another massive rescue plan? There are reasons for pessimism.

China and other Asian countries cannot launch massive public expenditures and greatly expand credit every two years. The last rescue plans have already created problems: in the Chinese case, a sharp increase of non-performing loans in the banking sector, along with inflation and speculative bubbles in real estate and on the stock exchange. Chinese banks will have to be rescued with public money. And as in the USA and Europe, it is always to workers that governments present the bill. In China, rescuing heavily indebted banks and local authorities would cost a lot of money, and if workers have to pay for it in one way or another, the objective of rebalancing growth in favour of domestic demand would be postponed to the long term, and with it would go the myth that China can drag the world out of crisis.