With a growing consensus by many observers that massive public borrowing by the U.S. and other major developed economies to fund economic stimulus programs has largely failed to stem the free fall in employment numbers and achieve its primary objective, it appears as the remaining hope of eternal optimists is China. In fact, the most hopeful projections of a return to global economic growth are based almost entirely on the Chinese economy. How ironic that the savior of global capitalism is determined to be the largest Communist state still in existence. Indeed, the latest IMF forecast of a return to modest growth is predicated on the aggregate projected growth of the Chinese economy being sufficient to lift the net global growth figures for 2010.
How realistic is this iconoclast faith in the capacity of China to lift the entire planet out of the doldrums of the Global Economic Crisis? In all probability, about as grounded in reality as U.S. Federal Reserve Chairman Ben Bernanke's gospel of green shoots sprouting from the muck of financial and economic decay.
We live in a surreal universe of economic analogies. Ben Bernanke has become a horticulturalist, preaching the botanical gospel of green shoots. Wall Street cheerleaders have displaced economic modeling with astronomy, peering through an opaque telescopic lens in search of enigmatic glimmers of economic light amid the nocturnal darkness of outer space. Policymakers are reassuring their anxious public by becoming weathermen of financial forecasting, boasting of meteorological evidence that the economic storm clouds are abating. But strangest of all is the collective obsession of the economic establishment in much of the developed world with oriental soothsaying. They are reading tea leaves and breaking apart Chinese fortune cookies in order to fathom what direction China's economic policy is headed, convinced that the old global economic order they are so desperate to revive and preserve depends on decisions being made in Beijing.
The single most important policy decision made by China's ruling circles was to enact an economic stimulus program of their own, totaling nearly $600 billion dollars. At first, desperate American and European economists and investors were fearful that the Chinese deficit-driven response to the Global Economic Crisis was not substantial enough. However, it is now recognized that as a proportion of GDP, China's economic stimulus is by far the largest in the world. It is far larger than the Obama stimulus package, for example, when calculated as a proportion of the total national GDP. Furthermore, the Chinese are executing their response to the synchronized global recession at a much faster pace than just about any other economy, including the United States.
On paper, the Chinese fiscal stimulus package appears to be bearing fruit. Projected growth rates for the Chinese economy in 2009 are currently predicted to exceed 7%. That figure alone is responsible for the overall negative global growth rate being forecasted by the World Bank not appearing even more sombre. No wonder so many policymakers and private financiers are looking gleefully at China's economy as the global restorer of capitalism.
When one looks beyond the manicured statistics, however, there appears a very dangerous side to China's economic stimulus spending that may, in the long-term, make things much worse for China and the overall global economy. The Chinese economy was based on an economic model that is now exposed as fundamentally flawed. Essentially, China functions as the world's factory, while its frugal citizens provided the savings that were transformed into credit that enabled U.S. consumers, in particular, to buy the output of China's assembly plants. The financial tsunami and credit crunch that has afflicted the world has broken that model, reflected in the decline in Chinese exports from a year ago by 30%. In theory, the Chinese stimulus program is supposed to make up for the contraction in exports by boosting domestic demand, so as to arrest the rise in unemployment. However, a different dynamic appears to be underway in China.
As dictated by the authorities in Beijing, staggering amounts of cash are being pumped into the economy. To illustrate the flow of capital being stimulated by China's fiscal policy measures, in the first half of 2009 Chinese banks loaned $1 trillion. By way of comparison, in all of 2008 only $600 billion was provided to borrowers by China's banks and financial institutions. With credit now flowing so free and easy towards Chinese companies, they are responding not by engaging in enhancing production and employment, but in rash speculation. In effect, the corporate sector in China is utilizing the stimulus money being doled out by Beijing to engage in speculation involving commodities, real estate and equities. In fact, Chinese companies are now establishing dedicated departments not focused on the intricacies of marketing, sales, R & D and production, but on the sole task of speculating with the money being literally forced down their throats by China's banks.
Easy credit leading to speculation and asset bubbles seems to be the path China is embarked upon. Where have we seen this before? In the United States, as a result of the Alan Greenspan bubble, when the Fed set interest rates too low, setting the stage for the subprime mortgage collapse in the United States.
As with deficit-driven stimulus spending elsewhere, China's fiscal response to the economic crisis is a stop-gap measure, and cannot be continued indefinitely. What happens when Beijing halts the pump-priming and slows down the printing presses? A strong possibility will be the mother of all asset bubble deflations.
The pundits who believe that China's economic policies are the most important factor in the ultimate outcome of the current Global Economic Crisis may be correct, but in a manner that is an inversion of their hopes. Rather than rescue the global economy, China's debt-induced credit fever may be setting the stage for an asset implosion of such severe intensity, it may be the final stage leading to an irreversible global depression.