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Expert : China May Be First and Last out of Recession

06-12 17:33 Caijing

China may be the last one to say goodbye to the recession, because it has to make "difficult adjustments" to transform its economy from exports-driven to domestic consumption-oriented.


By Caijing Staff

(Caijing.com.cn) China will be both the first and the last country to step out of the current recession, an expert on China's economy told Caijing earlier this week, emphasizing two approaches to understanding China's economic prospects.

"China will be the first one out of the crisis because it is least likely to be affected by it," said Michael Pettis, a professor of finance with Peking University's Guanghua School of Management, referring to the global recession.

As other economies suffered a negative growth rate, China's economy still enjoyed modest growth, explained Pettis, who is also a senior associate at the Carnegie Endowment for International Peace. 

"China is not going to have the contraction the rest of the world is having," said Pettis.

In another sense, China may be the last one to say goodbye to the recession, because it has to make "difficult adjustments" to transform its economy from exports-driven to domestic consumption-oriented.

The United States completed this transition in the 1930s and Brazil made the change in the 1970s. Japan is still going through the process.

"In each case, it's taken 10 or 20 years to make that adjustment. Still, the precedents are not very good," said the professor.

The recession is "probably the end of a development model that has been so-called the 'Asian development model' for the past 20 or 30 years, in which China has been a particularly important example," he asserted. "In fact, I call China the Asian development model on steroids."

The Asian development model depended on boosting savings, which meant constraining consumption.  At the same time, China put a huge amount of its resources in production facilities, he explained.

As production grew much faster than consumption, a trade surplus emerged, its existence dependant on another country's trade deficit, he said.

The United States has played this necessary deficit role, particularly in the last 10 years, he added.

Now, after the financial meltdown on the Wall Street, American households can no longer spend at former levels and have started to save, he pointed out.

"So in the United States, we're going to go through many years in which consumption is going to grow slower than production, which means that the U.S. trade deficit is going to come down dramatically, maybe even become a trade surplus," said the professor.

That scenario could pose a huge problem for countries like China that depended on their trade surplus for growth.

In this way, China has to transform its export-dependent economy into one that is driven by domestic demand, he said.

"They are not just adjusting to prices, but they're adjusting to a whole shipment of development law, which is very difficult," he said.

Like the precedents of the United States and Brazil, the transition may take 10 to 20 years—in this way, he concluded, China will be the last country out of the recession.

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