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Print Edition> Business
UPDATED: July 19, 2010 NO. 29, JULY 22, 2010
The Secret Behind China's Success
The resistance to external factors is the result of major achievements in China's reform and opening up over the past three decades

During the tumultuous period of the world financial crisis, China's economy sank, struck bottom and rebounded as its GDP in 2009 reached 8.7 percent, far beyond global expectations. But why has China succeeded so rapidly and what lessons can people draw from the experience? In hisrecent article China's New Deal: How to Response to International Financial Crisis, Hu Angang, Director of the Center for China Studies of Tsinghua University discussed these issues. Edited excerpts follow:


Since the mid-1990s, China began to accelerate its integration with the world economy, thus exposing itself to the impact of the changing international economic situation. It has withstood at least two major external impacts: One was the 1997-98 Asian financial crisis and the other was the 2008-09 international financial crisis. The former crippled China's export growth to 0.5 percent and foreign direct investment (FDI) growth to 0.4 percent in 1998. The latter resulted in negative growth rate for China's export sector for the first time in the nation's history. It also caused a drop in FDI.

But the 2008-09 financial crisis was global, rocking China and the whole of Asia. Yet, as seen from the internal system, the aftermath looked much better than 10 years ago and has provided favorable conditions for resisting external impacts. The resistance to external factors is the result of major achievements in China's reform and opening up over the past three decades. This can be seen from the following five aspects:

First, in terms of economic scale, 2008 GDP was 2.5 times that of 1998 if calculated by the constant price. The bigger the economy, the stronger its capacity against external impacts. This is a "big power advantage" as well as the advantage of domestic development scale.

Second, foreign exchange reserves reached nearly $2 trillion at the end of 2008, 13 times that of 1998. This has been the main economic strength against the financial crisis.

Third, Chinese businesses, especially state-owned enterprises, have risen rapidly as opposed to the situation 10 years ago. State-owned enterprises were inefficient in 1998. With sales margins lingering around only 2 percent, they were mostly in the red. In an extremely difficult position, they had to lay off large numbers of workers. But, by 2008, the sales margin of state-owned enterprises rose to 7 percent, more than triple that of 1998.

Fourth, the state-owned commercial banks were almost bankrupt in 1998 as their non-performing loan ratios reached as high as 40 percent. But now, their non-performing loan ratios have dropped to 2-3 percent and the profitability from assets reached 17 percent in 2008, with the pretax profitability reaching 30.6 percent.

Fifth, China's fiscal revenue reached 6.1 trillion yuan ($900 billion) in 2008, 6 times that of 1998, while the fiscal deficits of the year accounted for only 0.4 percent of GDP. The Chinese Government has thus had the capacity of financing the deficits by issuing treasury bonds to expand fiscal expenditures as a way of resisting financial crisis.

China's economic growth is determined by internal factors, with the external impact becoming secondary, even if it was more severe than in 1998. This indicates that China has been, from the very beginning, more advantaged than the other G20 members in leading the economic recovery. It is capable of not only reducing the external influence to a minimum but also translating crises into opportunities.

Road of China

China now has a fairly sound and efficient macroeconomic decision-making mechanism. On November 5, 2008, not long after the outbreak of the U.S. sub-prime crisis, Premier Wen Jiabao called an executive meeting of the State Council, which decided to adopt measures to boost domestic demand in order to bring the economy back on the steady and fast track. The stimulus package they developed covered 10 measures, involving an investment of 4 trillion yuan ($586 billion). On May 21, 2009, the National Development and Reform Commission released the composition of the 4-trillion-yuan stimulus package.

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