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Can China Save the World?

Author: Brian P. Klein, Former International Affairs Fellow in Japan, Sponsored by Hitachi, Ltd.
April 2, 2009
Far Eastern Economic Review

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Optimism for near-term China recovery, fueled by the widely reported $587 billion two-year stimulus package, is running high heading into the G-20 summit this week. Many countries are expecting Chinese demand to spur a new round of increased consumption. These hopes are unfortunately misplaced at the moment. The stimulus is neither large enough to stimulate demand lost from plummeting exports and declining investment, nor is it focused on addressing the concerns of the fragile middle class that might help China spend its way out of crisis.

And yet the spate of positive news is impressive compared to the U.S., EU and Japan-retail spending growing at 15%, car sales rising, bank lending expanding, energy use picking up and a 30% gain in the Shanghai composite index this year-all signs the stimulus and "the China Model" of controlled growth is working. Official confidence remains high that recovery is just around the corner and GDP growth of 8% is attainable. China seems most concerned about whether the U.S. will remain solvent enough to repay interest on its Treasury bills.

Taking a closer look at the numbers an 8% growth rate means an additional $360 billion in output, all other inputs to gross domestic product remaining the same. According to recent official Chinese statements only $173 billion of the stimulus is actually new spending. How much will be central government funded remains unclear (local government, banks and enterprises are expected to contribute 70% of the stimulus-though which stimulus, the previously announced $587 billion or just the new spending is equally uncertain.)

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