While politicians in Washington debate whether President Obama’s stimulus program is helping to pull the U.S. economy out of a recession, economists have already declared the winner in the stimulus race, and it’s China.
The Asian giant’s massive $586 billion stimulus package — implemented with speed in November just as the world economy was crashing — is credited with helping to stabilize world markets and contribute to a budding recovery in Asia, Europe and the United States, where the stimulus package came too late to prevent the worst recession in modern times.
China’s adroit and timely move to bolster the global economy is fueling support for giving the world’s third largest economy greater power in international venues as the Group of 20 meets this month in Pittsburgh.
“This year may be the first in which China’s economy has played a substantial role in determining the path of the global economy,” said John Makin, a Wall Street economist and visiting scholar at American Enterprise Institute.
“Their response was among the quickest,” Mr. Makin said. “In November, they announced their massive public works program that would, over a period of about two years, be the equivalent of 14 percent of [economic output] — an extraordinary amount by any measure. Japan’s largest stimulus packages during its ‘lost decade’ seldom reached 4 percent,” he said. The U.S. stimulus is expected to peak at about 6 percent of economic activity in the next few months.
Treasury Secretary Timothy F. Geithner last week hailed China’s role in helping stabilize the world economy. He said it was an important reason the G-20 finance ministers took further steps at a meeting in London this weekend to give China and other major emerging economies a greater say in world economic affairs.
“The actions of China and India were very important,” Mr. Geithner said. “Their commitment to cooperative force was a necessary complement to all the things we did in the U.S.”
Although the Chinese economy is still criticized for overreliance on exports for growth, Mr. Makin estimates that China’s stimulus, including a generous bank lending program, sent growth surging in China from a 2 percent rate in the fourth quarter to a 16 percent rate in the second quarter, giving a powerful lift to key trading partners in Asia such as South Korea and Japan.
China’s rapid rebound fueled major market rallies that spread around the world and prompted a surge in oil and other commodity markets.
In the United States, the transition of political power at the end of last year produced gridlock for a stimulus plan that economists say could have been just as significant.
Shortly after winning election in November, Mr. Obama asked President Bush to work with Democratic leaders in Congress to enact a stimulus package. But Mr. Bush refused, and congressional Republicans balked.
Congress did not pass a stimulus bill until February, shortly after Mr. Obama took office — too late to prevent the deep economic contraction from October to April. Mr. Makin estimates that the government spent less than it usually does in the first quarter, contributing to a 6.4 percent drop in economic output.
By the second quarter, which started in April, a trickle of funding from the $787 billion package of public works and social spending gave a 1.1 percent lift to economic output and helped to hold the contraction in the economy to 1 percent, Mr. Makin said.
“Fiscal measures [in the U.S.] did not contribute much until the second quarter of 2009 because countercyclical fiscal policy measures need time to produce their effects,” he said.
But inaction by the United States and other countries enabled China to shine. “No one can still doubt the power of Chinese policy measures to boost the economy and financial markets of China, Asia and the G-7 economies,” Mr. Makin said.
Although China’s unprecedented program helped to reignite the global economy, economists say, the emerging Asian giant will not be able to carry the load on its own. A lasting recovery will require a revival of the world’s main engine of growth — consumer spending in the United States, Europe and Japan, said Nariman Behravesh, chief economist at IHS Global Insight.
“As policy stimulus gains traction, the economies of China, India and South Korea are picking up, sparking rebounds across Asia” and contributing to fragile recoveries in the West, he said. “China, India, Brazil and other emerging markets will fill some, but not all, of the void” created by cautious Western consumers, who will try to rebuild depleted savings for a while longer, he said.
Economists say the government stimulus programs now taking effect in the United States, Europe and Japan also should help fill the gap left by beleaguered consumers for a while.
Some analysts say China’s strong performance during the global recession, when it was one of the few economies that never stopped growing, has put it on a path to overtake the United States as the world’s primary engine of growth and, eventually, the largest economy.
“China’s massive stimulus program and cash injection by the banking system is now the envy of the world,” said Jim Trippon, editor of the China Stock Digest. “The next power rising is clearly China, and what Americans should be doing is learning that this is a positive thing that they can profit from.”
Other analysts remain critical of the lopsided nature of China’s growth, which depends overwhelmingly on exports and public works spending. Consumer spending is not the main driver of growth in China as it is in the United States and other developed countries.
The U.S. trade deficit with China, already the largest with any country, has only grown during the recession as Chinese exporters gained market share against U.S. manufacturers, said Auggie Tantillo, executive director of the American Manufacturing Trade Coalition. He said China accounted for 78.5 percent of the U.S. deficit in manufactured goods in the first half of the year, up from 60 percent last year and 27 percent in 2001.
“This should alarm President Obama and the Congress,” he said.
Derek Scissors, an economist at the conservative Heritage Foundation, said China’s massive public works program is adding to an already bloated stock of buildings and public infrastructure and is beginning to look like a real estate investment bubble.
“China has been investing at a 20 percent annual rate for six years and counting. It has long passed the point of investing in low-return projects, and the question now is whether this is a bubble with Chinese characteristics,” he said. “Even before the stimulus, real estate investment growth was above 30 percent.”