An inevitable part of
the “new normal” will be an expanded role for the Chinese economy. But what
will that role be? How will China get from where it is today to where it needs
to be? What opportunities will it create and what problems will it present?
To answer these
questions, let’s start with an examination of China’s response to “the Great
Recession” through August 2009. China’s economy is still growing at between 8
and 9 percent per year, even with exports down by about 20 percent due to the recession.
As John Mauldin pointed
out recently at InvestorsInsight.com,1 stocks are up by a whopping 85 percent this
year in China, while both real estate and commodity prices are on the rise.
That’s because the Chinese have put in place a fast-track monetary
stimulus package that is very, very big relative to the size of China’s
economy. In fact, China’s money supply rose by close to 30 percent in the
month of June alone.
China’s stimulus
package, announced at about the same time as the one in the U.S., amounted to
about $586 billion. Some economists are predicting that the annualized growth
rate in China could soon reach 15 percent. In fact, analysts at Goldman Sachs
peg it at an astonishing 16.5 percent.2
Part of the reason for
this instant impact is the absence of a “liquidity trap” that hampers Japanese
and American efforts. As recently explained in Foreign Policy Magazine,3 China can artificially
stimulate its economy with greater ease and rapidity than the U.S. can, because
it’s still essentially a Communist dictatorship with a thin overlay of
market-based activity. The U.S. government can print money and hand it out,
but it can’t tell people what to do with it. It can’t force banks to lend, and
it can’t force consumers or corporations to spend.
Meanwhile, China is
doing exactly that. It is ordering its banks to lend out the money, and it’s
forcing companies to borrow it and spend it as quickly as possible. For years,
Western observers have expressed surprise over the pace of China’s growth. But
it’s...
