No more bad options

As the sovereign debt crisis in Europe and political gridlock in Washington continue unabated, the risks of another global recession have increased significantly. The only bright spot is the relatively robust growth in emerging market economies, particularly China, India and Brazil. But hopes that these emerging giants can ride to the rescue of the rich countries, either by purchasing their distressed sovereign debt or taking more of their exports, are both naïve and misplaced. Despite talks of "de-coupling" — the insulation of high-growth developing countries from stagnant mature economies — a potential global recession originating in the wealthy economies will inevitably drag down economic growth in the so-called BRIC countries.

On the surface, the prospect of a global slowdown, if not recession, is the last thing a country like China wants to face. Yet, in reality, economic crisis often brings rare opportunities for political leaders to take bold action and address deeply embedded structural problems. That is why the Chinese characters of crisis consist of two separate words: one for danger and the other for opportunity.

Unfortunately for China, its record for turning crisis into opportunities for structural reform is spotty at best. While Beijing seized the 1997-98 East Asian financial crisis to recapitalise its fragile banking system and fire more than 40 million workers in state-owned enterprises, it wasted the opportunity for reform provided by the 2008-09 global financial crisis and recession. Instead of mustering the necessary political courage to end its reliance on an investment-driven growth model and shrink the role of the state in the economy, the Chinese government used its massive stimulus programme to further distort the economy and undermine the sustainability of its future growth. As a result, China is now far less well-prepared to weather another global recession.

This assessment may seem overly harsh. In the eyes of foreign observers, China's oversized stimulus package, $600 billion in fiscal spending and $1.5 trillion in new bank loans in 2009, is what governments should do to revive growth. Taken together, the net stimulus injected into the Chinese economy in 2009 was equivalent to almost 40 per cent of GDP — a veritable display of "shock and awe". No wonder Chinese growth did not falter during the depth of the last global recession.

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