From crisis to crisis

In the crisis of the late 1990s, China was unscathed for two key reasons. It benefited from a closed capital account and a nonconvertible currency -- ignoring the IMF-sponsored orthodoxy of international finance and enabling it to hold the renminbi stable at a time when other Asian currencies were collapsing. And it drew support from a "proactive fiscal policy" -- mainly accelerated infrastructure spending -- that enabled it to offset the weakness of external demand in Asia and elsewhere in the world.

Unlike the home-grown Asian crisis of the late 1990s, the global crisis of 2008-09 was a far more serious threat to China. It hit the Achilles' heel of an unbalanced Chinese economy -- its sharply increased reliance on exports. Back in 1997, exports were only 17.5% of Chinese GDP, whereas by 2007 that ratio had more than doubled to 37%. In the aftermath of the Asian financial crisis, China made a huge bet on globalisation and its concomitant surge in global trade.    

That bet seemed to pay off handsomely. But when the global economy was brought to its knees in late 2008, China's strategy suddenly looked terribly wrong. In a short span of seven months, its export sector went from boom to bust -- with year-over-year comparisons going from +26% in July 2008 to -27% by February 2009. As a result, Chinese GDP growth (as measured on a sequential basis) plunged to a low single-digit pace in late 2008, and over 20 million migrant workers lost their jobs in the export-focused Guangdong Province. 

Not surprisingly, Beijing went into a high stage of alert. Borrowing a page out of the pro-active script of the Asian financial crisis, it quickly enacted a front-loaded Rmb4 trillion ($585 billion) infrastructure-dominated fiscal stimulus -- funded by a record Rm9.6 trillion in bank lending in 2009.  On the surface, it seemed to have worked like a charm. The Chinese economy snapped back sharply in the final three quarters of last year -- pushing real GDP up by a stunning 8.7% for 2009 as a whole, with growth momentum accelerating further to 11.9% in early 2010.

Yet, unlike the aftermath of the Asian financial crisis of the late 1990s, today's Chinese economy faces more serious post-crisis consequences. Excess liquidity -- an obvious outgrowth of an aggressive crisis-driven monetary easing -- has spilled over into the property markets. This has led to a serious speculative bubble that Beijing is now attempting to address through administrative measures. Moreover, the bank lending binge has resulted in mounting debt problems at local investment companies -- sparking heightened scrutiny by China's bank regulators that could well result in loan charge-offs in the second half of this year. And, unless China changes its currency policy, it could face mounting protectionist risks.  

Ironically, this state of affairs is very much at odds with the current IMF world view. In its latest World Economic Outlook (April 2010), the IMF states boldly that, "Asia is staging a vigorous and balanced recovery."  Yet nothing could be further from the truth insofar as China is concerned. Again, the two-crisis comparison is especially telling: Not only has the export share of its economy more than doubled from the late 1990s but the current account went from near balance a decade ago to a surplus of 11% in 2007 (and probably 6% in 2010). Moreover, the investment share of GDP went from 32% in 1997 to 47% in 2009, underscoring mounting risks of excess supply, whereas the internal private consumption share fell from slightly less than 50% in the late 1990s to a record low of 35% in 2008. 

Balance is not exactly the word I would use to describe the current state of the Chinese economy.  Nor is it consistent with the now three-year-old warning of Premier Wen Jiabao of a Chinese economy that is increasingly "unstable, unbalanced, uncoordinated, and unsustainable." China has, in fact, compounded its structural imbalances over the two-crisis span of the past decade -- leading to a worrisome and deepening sense of macro vulnerability. If not addressed, these imbalances could leave China highly exposed to the inevitable next crisis. 

For China, that is the most important lesson of these two crises: Imbalances ultimately catch up with any economy. Look at both Japan and the United States. China is in urgent need of a pro-consumption rebalancing. The good news is that Beijing understands this and seems likely to frame its upcoming 12th Five-Year Plan (2011-16) around a consumer-led policy agenda. But there is always the risk of complacency and inertia -- especially if the global recovery turns out to be more vigorous than expected. China must resist those temptations at all costs and break the daisy chain of unbalanced growth that has taken it from crisis to crisis.  

Stephen Roach is the chairman of Morgan Stanley Asia and the author of "The Next Asia" (Wiley 2009).