A number of economists believe that GDP growth in China is a mirage. The nation’s $585 billion stimulus package is allowing factories to produce at levels that they could not normally afford with the nation’s exports down so much. The central government is also flooding the country with liquidity making its easier for businesses to expand and consumers to have access to capital to increase their purchase of goods, most of them Chinese-made.
The World Bank believes that China is doing all of the right things and that growth in that world’s most populous nations is far from a hoax. According to Bloomberg, the agency believes that “China’s economy will expand 7.2 percent in 2009 from a year earlier, up from a 6.5 percent forecast in March.”
The World Bank has been known to be wrong in the past. Even it is questioning what will happen in China once the stimulus spending ends.
Two things may happen. The Chinese government may double down and put several hundred billion more dollars into its own economy. That could cause inflation as the demands for products within the country surges due to a large amount of available capital. A larger stimulus package could also simply delay the day when China will have to face the fact that the long recession has deeply cut into demand for its exports.
China’s recovery could be “V” shaped, if its efforts to revive growth do indeed lead to 7% GDP growth, but the government risks a “double dip” recession by manufacturing a recovery that is not really built on market forces and is not really a recovery at all.
Douglas A. McIntyre
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