China’s economy growth rate reached 8.9 percent during the third quarter of 2009 which along with the optimism, generates some questions regarding the future world order.

 What the figures tell us…

Compared to the previous year, the Chinese economy expanded 8.9 percent. The annual average shows 7.7 percent increase, which indicates that China will be able to meet the 8 percent GDP growth plan. The accumulated amount of GDP reached 21,780 billion Yuan equals to 3,180 billion dollar in the first three quarters of 2009. The Chinese government expressed strong optimism to be able to keep this pace and hit the 8 percent planned average. As a consequence of the financial crisis, the export-oriented country experienced radical decrease in its trade revenue which was followed by fiscal and monetary stimuli. Significant infrastructural investments, railway and road development projects and other constructions were financed by the temporary policy, which eased also loan conditions and increased level of consumption. The total asset investments amounted to 15,500 billion Yuan, 2,270 billion dollar in the first three quarters of 2009.

Investment, as one of the most important factors for sustaining economic growth is also key point in reversal of recession and downturn. According to the Chinese National Statistic Office, one-third part of the economic growth is generated by the expansion of domestic consumption, while the consumer and producer prices are in deflation for seven consecutive months now. In spite of the significant increase in the industrial production, the level of retail trade, the profit of the biggest producers is still sinking, fell by 10.6 percent in the first eight months compared to 2008.

Facing the problems – Fiscal and Monetary Stimuli

The Chinese government announced that they are aware of the economical and social situation, and that lots of problems are waiting for solution such as the industrial production surplus, necessity for new industries, sustainability of good loan conditions or problems with unemployment. The fiscal and monetary stimuli were applied as a response to the crisis to support consumer spending, try to slow the pace of increase of unemployment and to help to small and medium size companies to get loans with eased conditions.

Partly because of these stimuli and because of the huge capital inflow and liquidity, the real estate sector is increasing since the second quarter of 2009. However, this improvement is standing on quite weak legs since any change in the current situation, like decline of risk appetite or governmental changes would immediately cut back the positive signs. And regarding the governmental changes, it is a fact, that the fiscal and monetary stimuli cannot be sustained forever.

There are different opinions within the Asian countries, when there comes exactly the moment, when stimuli should be started to cutback, but they agree, that it is inevitable. To stay under the big umbrella of the government is not healthy for the economy therefore the change should be done as soon as it is possible, the most probably around the middle of 2010. And that time will be the real proving for the economy whether the seemingly quick recovery is a steady and stable reversal from the recession and the crisis, or it is illusory success story with another bubble waiting to explode.

American dollar versus Chinese Remnibi

It is almost well-known all around, that the value of China’s currency is not led by supply and demand on the financial market but more influenced by the Chinese authorities through an artificial intervention in the current quantity of the currency on the market. It means that with pushing or pulling their currency into or out of the market, they can influence the value of the currency, which is fixed with a constant rate to the American dollar.

This method does not have any problem per se; moreover, it proved itself to be appropriate way to survive in the Asian crisis during the 1990s. However, it queries whether it is applicable in every situation, especially now, in the middle of a tough recovery procedure, when thanks to a high trade surplus, the value of the Chinese currency should have increased fast, but still following the dollar’s on a parallel devaluation path. Chinese authorities sold enormous quantities of their currency and in return, they bought foreign assets, mainly in dollar. The question is right: Is it reasonable? It seems more and more, that China’s currency policy may cause problems for the world economy for instance by generating another asset bubble. According to some experts, it is also possible that with the increasing asset purchase, China’s buying up contributed to the housing bubble in the U.S. which gave the starting pistol-shot for the financial crisis.

Conclusion

After the announcement of the third quarter results, the hand of the Chinese investors on the stock exchange started to shiver. The MSCI Asia Pacific index shrunk by 0.5 percent while the dollar strengthened by 0.2 percent for the news. It seems that the expectations are increasing toward the necessary change in Chinese currency policy to avoid another bubble. The publicly asked question is, how long the Chinese leaders will postpone their decision, which seems harmful for the whole world economy.

The silently asked, suspicious question, however, is whether it is really so transparent and obvious mistake what the Chinese government is up to, or maybe their scenario is ready to play on the world market which is called “competition”. The time maybe arrived for China to leave some unforgettable signs in the economic history on what China’s role in the world order of the 21^st century.