China Feels After-Effects of Economic Stimulus

At the Los Angeles Times, David Pierson examines the hangover from China’s efforts to combat the 2008 financial crisis, beginning in a gleaming but deserted shopping mall in Beijing:

“It gets better on weekends,” said a hair-clip vendor flipping through a magazine.

Opened last year amid a nationwide construction frenzy, this sleepy mall may ultimately prove successful. But for now, the project shows why China won’t be spending big in the event of another global recession: It’s still paying for the last one.

To shield its economy from the fallout of the 2008 financial crisis, Beijing orchestrated a massive economic stimulus. It invested billions in infrastructure projects and encouraged banks to open the credit spigot to fund construction of apartments, office towers and retail centers.

The strategy catapulted China past Japan to become the world’s second-largest economy; its growth helped keep the global slump from deepening … But like taking steroids, there were side effects. The burst of credit has fueled inflation, which is proving painful for average Chinese. Soaring prices for pork, vegetables and other staples have authorities worried about the potential for social unrest. So has a property bubble that has put home ownership out of reach of millions, exacerbating the gulf between rich and poor.

See also ‘China can’t – and won’t – save the world‘, from The Telegraph:

As the West contemplates a new bout of financial meltdown, the second biggest economy on Earth might appear to be well placed to ride above the angst ripping through the markets – or even use its wealth to come to the rescue of the richer world.

On the surface, China seems to have many reasons to smile. In the first half of this year, it registered growth of 9.5 per cent, with exports 24 per cent higher than in the same period of 2010. It sits on a $3trillion mountain of foreign reserves, and has become the lender of last resort to the US administration. Foreign governments, meanwhile, have muted criticism of its human rights record: as Hillary Clinton has remarked, “How do you talk tough to your banker?”

Yet the depressing truth is that China finds itself in a series of binds which limit its ability – or its willingness – to play the global role that should go with its economic weight … Since they pulled themselves out of an economic hole in 2008-9 with a £1.3 trillion programme of credit expansion and infrastructure spending, the bureaucrats in Beijing have had two great fears. The first is that the effects of that programme, combined with pressure on food supplies and rising wages, would spawn rampant inflation. The second was that demand for China’s exports would fall as the West went into a double-dip recession.

Sources:

China feels after-effects of economic stimulus – Los Angeles Times
China can’t – and won’t – save the world – Telegraph