The China Stimulus Follies

China managed to pull another rabbit out of its growth hat. The world’s most populous nation said its GDP grew 8.9% in the third quarter. Some outside analysts are skeptical about how China keeps its records of such things, but its economy is clearly growing faster than that of any other large economy in the world.

Today, China announced its purchasing managers index rose to 55.2 in October up a point from September. The index has risen eight straight months and that has caused economists who follow China to say that the nation’s stimulus package of $585 billion is working perfectly.

The stimulus is working perfectly in China while it is not in the US. The Administration claims that the $787 billion being invested by the American government has allowed the economy to add nearly 700,000 jobs. That is not very much at all in country which has an unemployment rate of nearly 15% when all people who could work full-time and are not get factored in.

China’s stimulus may work,  but it has also becoming a financial addiction. Domestic demand was given as the reason for most of the improvement in the manufacturing sector last month and domestic demand is being driven by the money the central government is dumping into the pockets of banks and consumers. Consumers in China should actully be spending less . Unemployment in the factory sector has certainly risen because exports are down so much. Factory jobs have helped created the Chinese middle class. The middle class in China should be shrinking and not growing because of the recessions in nations that the communist-run country sends its manufactured good to.

Put simply, China should not be doing terribly well economically, but it is. The consensus is that the great economies of the West and Japan are recovering now, even if job losses are still rising. That leads to a confusion about whether the recovery as it is now will help China much at all. A jobless recovery is a consumer-less recovery and that removes the main engine of a real improvement in the communist mainland economy. It means that, without a sharp recovery in employment  the US, UK, and EU there is almost no question that the Chinese will have to double down on a second several hundred billion in stimulus in 2010.

China’s huge advantage is bridging its way from the good economic times in 2006 and when a real, robust recovery takes place in the developed world in the future is that it can afford another $500 billion package, and perhaps another as large after that. China runs the risk of the tremendous liquidity that goes with these programs causing bubbles in equity assets and real estate. It would seem that is a modest price to pay for keeping China’s growth rate at 8% of better. In a totalitarian society, the equity market and real estate prices can be limited by the whim of the government, although that is not as easy as it once was now that China is partly a free market society.

The China miracle may prove itself to be nothing more than a miracle of its $2 trillion in foreign currency reserves, available to whatever extent the central government believes that it must be. No other economy in the world has a financial arsenal with power even close to that.

The global economy may be staging a very modest recovery which began last quarter, but a second recession is still a possibility.  China can buy its way out of a second recession. A free market economy has seemed like a blessing in the US and among its allies. It is less of a blessing now, and the sense of that loss may last for longer than a year or two.

Douglas A. McIntyre