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China's Policy Response to the Global Financial Crisis
Speech by Haruhiko Kuroda, ADB President, at the China Development Forum 2009, Beijing, People's Republic of China
Your Excellencies, distinguished guests and fellow presenters, ladies and gentlemen,
It is an honor for me to be here once again at this important Forum. I welcome the opportunity to discuss China's policy response to the global financial crisis.
After 30 years of successful economic reform, China has emerged as the third largest economy in the world. As such, China increasingly influences global economic activity. Amidst the international economic recession, China's stability has become crucial to containing the crisis.
2008 was a difficult year for China. Despite the impressive achievement of successfully holding the Olympic Games, there were tragic events, in particular the devastating Wenchuan earthquake. For an export-driven economy, the external environment has turned unfavorable. The global recession has depressed exports; posing daunting challenges for economic growth and employment generation.
Still, China has shown resilience. China today is more resilient to external shocks than it was a decade ago when the Asian crisis hit the region. After years of prudent economic policy making, the country has achieved commendable fiscal consolidation and a strong external position. It has also accumulated the largest foreign exchange reserves in the world. The banking sector in today's China is on a sounder foundation. Following a series of appropriate reforms, asset quality, profitability and capital adequacy in the banking sector have improved.
The soundness of the banking system, and the limited direct exposure of banks to sub-prime and related securitized products, have helped China to face the current financial storm with confidence. However, the impact of the crisis has been felt in the real economy through falling external demand and growing unemployment. Plummeting exports brought down industrial output to a seven-year low in the fourth quarter of 2008. The significant number of job losses and the adverse effects of the crisis on the poor and vulnerable people underline the need for greater and concerted efforts to ameliorate these human difficulties sooner than later.
The government must be commended for its prompt response to the crisis. The fiscal stimulus package launched in November 2008 to arrest the economic slowdown is substantial. Its investments, which amount to 4 trillion yuan, equivalent to 16% of 2007 nominal GDP, are largely focused on infrastructure development. The stimulus package will foster construction and related industries, generate employment, and promote social stability. We are pleased to note, from Premier Wen Jiabao's speech at the 11th National People's Congress, that the Government is complementing the stimulus package with a range of measures to stimulate demand and address the social implications of the crisis. These include measures to train and provide employment for laid-off migrant workers and fresh university graduates, the further development of housing for low-income groups, and measures to stimulate demand in rural areas. I am confident that effectively implemented these measures will help to address the concerns of vulnerable groups who are hardest hit by the crisis.
The crisis presents a unique opportunity for policymakers to address lingering structural economic constraints, and to allocate resources optimally for priority development needs. I would like to draw your attention to two issues in particular.
First, during the past three decades of reform, critical sectors including education, health, and social security have received relatively less resources and attention. However, these are fundamental factors for sustainable development and growth. Promoting economic growth as a strategy for poverty reduction is important. But because growth can also bring imbalances and inequality, it is necessary to develop responsive redistributive mechanisms and policies, and effective safety nets to protect the poor and the vulnerable without diluting the incentive structure or undermining the market system. Increased public social spending on public goods and services will enhance the effective implementation of the stimulus package, and is a key stepping stone towards a more balanced pattern of economic growth.
Second, I would like to reiterate the importance of the environmental challenge. China's rapid development has come at significant environmental cost. In recent years, environmental issues have emerged as a priority on the government's agenda. Rapid economic growth and China's high dependency on coal as an energy source has resulted in high levels of air and water pollution. The prosperity brought about by the successful economic transition has prompted the acquisition of automobiles at a faster pace than infrastructure development. This in turn has increased CO2 emissions to equally alarming levels. Additional efforts are required to foster a sustainable process of urbanization. These include improved water and waste management, better land use and management, and increased energy efficiency. The formidable challenges arising from the climate change agenda add to the task.
Notwithstanding China's commendable progress during the last 30 years, a more determined stance towards inclusive and environmentally sustainable growth is needed. By stepping up efforts to address both challenges, the current model of growth will evolve into a more balanced pattern. Increased social protection and public services, and better opportunities for the poor, will help to make growth inclusive. By reducing precautionary savings, China can also foster consumption and domestic demand. A more environmentally sustainable approach to production will facilitate the transition from the current capital intensive-industrial emphasis to a services-driven economy.
Ladies and Gentlemen, great challenges require great efforts. China's strong fiscal position, underpinned by an adequate and expansionary monetary policy, provides ample room to finance the transition to a more balanced consumption-based pattern of growth. Key to this process are upgraded human resources; labor market reforms to promote employment generation and absorb rural labor surpluses; and financial sector reforms to facilitate wider access to financial resources, particularly for small and medium industries and households.
Addressing the unprecedented scale of the global economic crisis requires not only national efforts but initiatives at the regional and global levels. From the regional perspective, I would like to commend China for its proactive role in forging an agreement among the ASEAN+3 countries just a month ago in Phuket, to expedite the operationalization of the multilateralized Chiang Mai Initiative (CMI) and expand the size from $80 billion to $120 billion, to deepen regional cooperation. Constructive joint efforts are imperative to reform the regulatory and institutional framework for the world's financial systems. The forthcoming G20 Summit on Financial Markets and the World Economy gives China an opportunity to raise its voice and play a relevant role in the construction of a new financial order.
At the Asian Development Bank, the region's key development partner, we will do everything within our mandate to support the countries of the region in addressing the challenges posed by the current global crisis. The G-20 countries including China, Japan and Korea have jointly called for a substantial capital increase for ADB, to ensure that ADB has an adequate capital base to fulfill its role in the region. As part of that role, we stand squarely alongside China in its efforts to make the development process more inclusive and sustainable, for the benefit of the region, the world, as well as the generations to come.