China's Crisis Response Goes Global

China has been an essential player in fostering a global economic recovery. As one of the first countries to announce a massive stimulus package last November, China brought increased stability to markets when it was dearly needed. Today's conventional wisdom holds that in order to ensure a stable global recovery, Chinese consumers must increase their consumption patterns to fill the economic void left by their battered American counterparts (see previous post).

Can the Chinese government succeed in boosting domestic consumption? Are there other initiatives that China can take to put the global economy in motion?

The answer to both of these questions is a tentative 'yes'.

In regards to stimulating domestic consumption, assertions that the Chinese aren't spending enough may be overblown. For example, Morgan Stanley released a report last week arguing that China's under-consumption is over-stated, and that Chinese consumption is likely to increase:

The absolute level of personal consumption in China is not nearly as low - compared to that in the US - as perceived by many market participants. Moreover, while the domestic dimension of China's under-consumption - namely consumption growth having lagged investment and export growth in China - is a valid observation, the absolute level of growth of China's personal consumption is remarkably strong in a global context. The incremental contribution of Chinese consumers in USD terms to the global consumption of tradable goods started to exceed that of the US in 2007.

Furthermore, China's crisis response efforts have gone beyond getting its citizens to buy more automobiles and appliances. This week, China took two steps towards assuming a greater international leadership role in putting the global economy back on its feet. 

First, Hu Xiaolian, deputy governor of China's central bank, proposed the formation of a multinational sovereign wealth fund to assist developing countries gain access to capital. In a report released in anticipation for today's G20 summit, Xiaolian suggests:

Considerations can be (given) to setting up a 'supra-sovereign wealth investment fund' to help channel capital inflow into developing world so that these countries can serve as new engines in global recovery.

Second, in a speech to the UN yesterday, Chinese president Hu Jintao announced that China will take an active role in providing assistance to the developed economies most hit by the crisis. The English-language China Daily reports:

China will increase support for those hit hard by the global financial crisis, earnestly implement relevant capital increase and financing plans, intensify trade and investment cooperation and help raise their capacity for risk-resistance and sustainable development.

By stabilizing capital markets in developing economies, China appears to be following the suggestions laid out by World Bank President Robert Zoellick:

First, leaders should recognize that developing countries are a key part of the solution... With access to finance, other developing economies can help boost a global recovery.

Second, leaders should emphasize that a balanced and inclusive global economy needs multiple poles of growth... It is not far-fetched to imagine Chinese investments in Africa expanding to manufacturing and light industry. To build multiple poles of growth we need investments in infrastructure and energy, private sector expansion and regional integration linked to open markets.

The 2008 Beijing Olympics were meant to symbolize China's ascent to the world's stage. However, it may be the global financial crisis, rather than the international sporting event, that cements this transformation.