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In the midst of the global financial crisis that followed the
collapse of Lehman Brothers Holdings in 2008, China embarked on
one of the worlds largest stimulus packages, injecting
4 trillion yuan ($630 billion) into its economy
through a massive bank lending program. The policy succeeded
brilliantly, boosting growth to a rate of more than 9 percent
in 2009 and more than 10 percent in 2010.
The stimulus spending also reignited Chinas red-hot
property market, leading real estate prices in some major
cities to triple over the past three years and driving consumer
price inflation up to a three-year high of 6.5 percent in July.
To prevent a destabilizing inflationary outburst, the
Peoples Bank of China tightened policy aggressively in
the past year, raising interest rates three times in 2011 and
lifting bank reserve requirements six times. The reverberations
have been felt throughout China as banks have pulled in credit
lines, forcing some companies into bankruptcy.
Now the authorities stand at a critical juncture. Their
tightening efforts have combined with weakness in Chinas
main export markets, Europe and the U.S., to raise the threat
of an economic hard landing, with sharply slower growth and
rising unemployment. Thats a chilling
prospect for the global economy at a time when Western
countries are struggling under a mountain of debt. Can Chinese
policymakers fine-tune their economy to avoid a downturn and
maintain growth at a strong and sustainable rate?
Most analysts are confident that Beijing can avoid a crash.
They point to the unexpected easing by the central bank, which
cut reserve requirements at the start of December in the first
such move since 2008, as evidence that the authorities are
aware of the risks to growth and have sufficient means to
The Chinese government still has multiple tools to
deal with any liquidity or illiquidity issue, says Victor
Shih, an associate professor of political science at
Northwestern University, in Evanston, Illinois, who warned
about the borrowing binge unleashed by the stimulus program.
Up until now they have reacted in a timely
Paul Schulte, Hong Kongbased global head of financial
strategy and Asia banks research at CCB International
Securities, a subsidiary of China Construction Bank Corp.,
estimates that in the past 12 months Chinese regulators have
removed 4.4 trillion yuan in liquidity from the financial
systemwell in excess of the original stimulus
spendingthrough tightening; he predicts that they are
about ready to reverse course and ease. Credit growth is
running at about 6 percent, while nominal growth is running at
about 18 percent, he says. This is clearly