A Huge China Stimulus as the Developed World Falters?

China may unleash a stimulus package of more than $700 billion if the global economy slows enough to undermine the GDP growth of the world’s most populous nation. Deutsche Bank made this observation based on conversations with government officials. Such a package would come at a time when developed nations cannot afford any stimulus at all, even though they are entering a new period of recession. It demonstrates, more strongly than anything else, the difference between what China can do compared to the U.S., Japan, EU and UK.

Ironically, the Chinese decision would be based on the failure of developed nations to renew GDP growth though stimulus. The U.S., for example, has posted GDP growth of only 1% recently. Job creation has halted. President Obama will present a jobs package with $3 trillion in cuts to the federal budget through 2020. Congress likely will reject the plan, though. That means whatever stimulus the employment market might get will not happen. This in turn could raise the barriers to GDP expansion, which would put China’s rapid growth rate in jeopardy.

China’s export machine still depends mostly on exports to the West, even though recent PMI numbers have been moderately good. The consumer economy inside China may be growing rapidly, but it cannot replace overseas demand. And that demand is at great risk.

The Chinese may begin a stimulus program late this year, or early next, if the signals of an economic stall in the developed world worsen. Austerity plans in the EU and U.S. will almost guarantee that it will be left to businesses in both regions to drive new job additions and to consumers to increase their activities. Those things will not happen. And China alone among the world’s largest economies can afford to weather the developing global recession without much damage.

Douglas A. McIntyre