The Research Division of the Federal Reserve Bank of St. Louis published a working paper titled “Withstanding Great Recession like China”. Authors Yi Wen and Jing Wu are academics at Tsinghua University, and their research suggests that the huge stimulus package put in place by the Chinese government in 2008 was a huge factor in why China suffered very little from the Great Recession of 2008-2009.
A quote from the abstract of the paper summarizes the authors’ argument: “The Great Recession was characterized by two related phenomena: (i) a jobless recovery and (ii) a permanent drop in aggregate output. Data show that the United States, Europe, and even countries with lesser ties to the international financial system have suffered large permanent losses in aggregate output and employment since the financial crisis, despite unprecedented monetary injections. However, the symptoms of the Great Recession were not observed in China, despite a 45% permanent drop in its exports one of the largest trade collapses in world history since the Great Depression. Our empirical analysis shows that China is success in escaping the Great Recession is attributable to its bold and powerful 4 trillion renminbi stimulus package launched in late 2008.”
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Relative impact of 2008 economic stimulus programs
The paper begins by pointing out the difference in effectiveness of the global stimulus programs enacted by many countries in 2008 and 2009, highlighting China’s relatively strong economic performance since the financial crisis. The discussion of GDP growth below makes it clear China has bounced back from the crisis much more robustly than other nations.
“Most strikingly, GDP levels in these developed countries have declined permanently since 2008 by as much as 10% below their respective long-run trends, despite more than 5 years of continuing quantitative easing after the crisis. China’s GDP level, however, had fully rebounded to its long-run trend in early 2010 without appealing to unconventional monetary policies. Total industrial production in China nearly doubled between 2007 and 2013 despite the crisis and an extremely weak international demand for Chinese goods, whereas the United States has experienced zero growth in industrial production and that in the European Union and Japan has declined by 9.3% and 17.1%, respectively. No wonder China’s economic growth contributed 50% of global GDP growth during the crisis (IMF, 2010), even though its income level accounted for less than 10% of world GDP and its total export demand has remained 45% below trend since the crisis.”
What was different about China’s stimulus?
Authors Li Wen and Jing Wu argue the key difference was not just the size of China’s stimulus package, but how the government creatively used state-owned enterprises as fiscal instruments. “China implemented bold, decisive fiscal stimulus programs that no other major nations dared to adopt. In particular, the Chinese government cleverly used its state-owned enterprises (SOEs) as a fiscal instrument to implement its aggressive stimulus programs in 2009, consistent with the very Keynesian notion of aggregate demand management through increased government spending and the fiscal multiplier principle.”