What Does China Do When The Stimulus Well Is Dry?

chinaThere is no shortage of cleverness among the bureaucrats who run China. Exports in May fell more than 26% according to the country’s customs agency. That rate was worse than the 22.6% decline in April.

To balance the drop in exports, the Chinese government has continued to pump what it says will be $585 billion into the national economy. That helped May capital investment spending to jump almost 39%.

Economists began to talk about the miracle of the Chinese government when GDP in the world’s most populous nation began to pick up substantially two months ago. Most analysts stayed away from the issue of the central government’s ability to prop up economic expansion. No one from outside China can know when the $585 billion being pumped into the economic and financial system will run out or whether the government will increase that figure to keep internal consumer and business demand at relatively high levels.

The problem with the Chinese solution to offset slow exports and faltering GDP is that, once the investment is over, the economy comes crashing back to earth. That fall can only be offset if demand for Chinese goods in the US, UK, EU, and Japan jumps quickly and sharply. With oil prices and interest rates rising in developed nations, the availability of capital to spend on imports is likely to be extremely modest, which means the Chinese economic recovery has a ghost-like quality.

From the standpoint of the most strict economic standards, the economic recovery in China is artificial. It is government spending racing a global GDP recovery. Based on forecasts that growth in the West may be anemic for another two or three years, China’s investment to keep its economic engine viable could cost it well over $1 trillion.

Douglas A. McIntyre