CHINA’S ECONOMIC policy now matters a great deal for the rest of the world as well as for its own 1.2 billion inhabitants. At the National People’s Congress, its annual parliament meeting which concludes tomorrow, deputies have heard from premier Wen Jiabao that its economy will grow by 8 per cent this year. He announced increased social spending and confirmed some details of the €464 billion stimulus package intended to shift priority to domestic consumption and away from the soaring increases of exports and imports characteristic of its recent growth.
Since China is the only part of the global economy where demand is still growing, Mr Wen’s speech attracted more than the usual international attention. How this stimulus is used will certainly affect economic activity elsewhere. Unfortunately he did not give a detailed account of how and where the money will be spent, so it is difficult to evaluate the package in macro-economic terms. More investment in rural households should help them take up some of the demand lost in exports. Extra health, pension and social protection expenditure should gradually coax families to spend more of the income they presently save, with the same effect on aggregate demand. But this will undoubtedly take time. It would be foolish to expect too much of an effect on world demand from this relatively slow transition.
Mr Wen was cautious about two of the other principal determinants of Chinese policy, the budget deficit and the exchange rate of the yuan. The deficit will be limited to 3 per cent, far below many other states dealing with the recession, but in keeping with China’s prudent fiscal policy. And he indicated the exchange rate will be kept stable, a disappointment for the Obama administration which complains it subsidises continuing cheap Chinese exports.
The Chinese Communist Party leadership knows full well how difficult a year this will be for China’s rulers and citizens alike. Mr Wen said bluntly it is facing its worst financial crisis in a century. Politically, too, it is an exceptionally fraught year. The anniversaries of the 1949 revolution, of the 1959 Tibetan revolt, and of the Tiananmen democratic rebellion in 1989 will test the ruling party’s legitimacy. Some 20 million workers have lost their jobs and may protest if social protection fails to help them. And the country’s long tradition of public petitioning is being revived by ordinary people who have lost out in the hectic pace of modernisation.