Just as China led the world in economic recovery in the aftermath of the global financial crisis of 2008, it is playing a similar role today, in the COVID-19 era, said Stephen Roach, a faculty member at Yale University.
China is going full steam ahead in gathering post-COVID momentum while the developed world remains on shaky ground, including the United States.
The expert believes China”s crisis-response strategy was far more effective than that deployed by the US, despite great differences between the two crises.
In the five years following the onset of the 2008 crisis, annual real GDP growth in China averaged 8.6 percent (on a purchasing power parity basis). While that was slower than the blistering (and unsustainable) 11.6 percent average pace of the five previous years, it was four times the US economy’s anemic 2.1 percent average annual growth over the post-crisis 2010-14 period.
Similarly, China’s economic recovery gathered pace in the third quarter of 2020, with GDP growth in July-September registering at 4.9 percent from a year earlier, boosted by investment and exports.
The growth beat the second quarter’s 3.2 percent, which reversed the first contraction on record at 6.8 percent in the first quarter. In the first half of the year, the economy declined by 1.6 percent, but it rebounded to a 0.7 percent rise in the first three quarters.
Based on incoming high-frequency (monthly) data, the so-called GDPNow estimate of the Atlanta Federal Reserve puts third-quarter sequential real GDP growth in the US at around 35 percent.
“While that is a welcome and marked turnaround from the record decline during the lockdown, it is about 20 percentage points short of China’s post-lockdown rebound and still leaves the US economy about 3 percent below its peak of late 2019,” Roach pointed out.
Roach elaborated that when the 2008 subprime crisis swept through the world, China’s objective back then was crystal clear from the start: address the source of the shock, itself, rather than the collateral damage the shock caused.
China rolled out a 4 trillion yuan ($596.4 billion) fiscal stimulus that year and it worked. The strong, decisive actions helped China “insulate its markets from a virulent financial contagion.”
Today, in the same way, China has insulated its citizens from a virulent pandemic with strict public-health measures, and “made judicious use of monetary and fiscal policy to reinforce the post-lockdown snapback.”
“This is very different from the approach taken in the US, where the post-lockdown debate is more about using monetary and fiscal policies as frontline instruments of economic liberation, rather than relying on disciplined public-health measures aimed at virus containment,” added Roach.