THE most China can realistically do for the struggling
global economy is to ensure its own growth holds up, and that won't be nearly
enough to lift the world.
Visions of China putting its $3.2 trillion in reserves to
work by launching another government spending spree or buying up European bonds
ignore the political and economic reality that China, like any other country,
puts its own needs first.
Right now, China's economy doesn't need more stimulus and
its leaders are wary of making bad bets on European debt, which means if
conditions worsen in the United States or Europe, China would respond only if
and when trouble shows up at home.
But even if you sweep aside domestic considerations and
imagine Beijing announced $600bn in government spending, like it did after the
Lehman Brothers collapse in 2008, there is little chance it could deliver the
same economic boost.
What ended the post-Lehman panic was a globally
synchronised, massive infusion of government spending and interest rate cuts.
The United States and Europe cannot deliver significant doses of either right
now, and China alone can't compensate.
"China to the rescue? Mission impossible,"” said
Jun Ma, Deutsche Bank's chief economist for China, based in Hong Kong.
To offset the impact of a 3% drop in US and European growth,
China would need to increase its own growth by 18%, he said.
What China may do
The image of China riding to the world's rescue after Lehman
misses a critical point: China's response made sense for China. That it also
came at an opportune time for the rest of the world was a bonus.
Back then, China, the United States and Europe were on the
same page. Lower interest rates and higher government spending were the logical
policy choices in every major economy as confidence evaporated and global trade
collapsed.
Not so today.
China's stimulus package carried some unpleasant
side-effects that are still causing trouble in the economy today. The two
biggest issues - high inflation and heavy local government debts - argue
strongly against Beijing going for a bold new spending plan now.
China's Communist Party prizes stability. Runaway inflation
can trigger social unrest. Tales of squandered public money can spark outrage
too.
But if conditions worsen abroad and China's own economy
shows signs of slowing more sharply than expected, there is some room to ease.
The grand total would probably be well shy of the $586bn post-Lehman package.
Beijing already expects growth to slow next year, and in
fact would welcome a modest cooldown to ease inflation. A government official
acknowledged earlier this month that 2012 growth may dip below 9% for the first
time in a decade.
Anything below 8% would certainly set off alarm bells. Many
economists consider that the minimum needed to generate enough jobs for a
rapidly urbanising population.
Barclays economists recently cut their 2012 growth forecast
to 8.4%, joining a long list of economists predicting growth will sink close to
that critical line.
If that threshold were threatened, China's most likely
approach would be to direct spending to areas Beijing has already identified as
underdeveloped or in need.
The investment list would probably include building more
housing for low-income families, developing agriculture, or perhaps cutting
taxes for small and medium businesses.
For the rest of the world, such measures might mean a bit
more demand for building materials and perhaps a slight uptick in consumer
spending that benefits multinational companies.
But if the United States or Europe slips into even a mild
recession, the lost output would quickly dwarf any incremental Chinese growth.
In 2009, the worst phase of the global recession, US gross
domestic product (GDP) fell 3.5%.
Let's say it drops a relatively modest 1% in a new downturn.
That would work out to about $133bn, or roughly 23 cents out of every dollar
China spent in its last stimulus.
As for buying more European debt or perhaps increasing
International Monetary Fund (IMF) funding, there is some scope for Beijing to
help. But that will involve overcoming strong opposition from some important
officials - not to mention incurring taxpayers' ire should the investments go
sour.
"Europe should absolutely not put too high expectations
on China," Wei Jianguo, a former Chinese commerce vice-minister who now
heads a top government think tank, told Reuters in an interview on Thursday.
What else China could do
Ironically, stepping up stimulus spending would take China
in the opposite direction from what the Group of 20 has recommended to try to
even out imbalances between surplus and deficit countries.
China is often accused of over-investing and doing too
little to spur domestic demand. Investment now amounts to almost half China's
GDP, higher than even 2008, when Beijing ramped up spending to host the
Olympics.
One of the most valuable contributions China could make to
rebalance the global economy and lift growth is to let the tightly managed yuan
currency rise more rapidly. It appeared ready to do so in August, when the
central bank set a series of record-high trading midpoints.
But it pulled back a bit in September. If anything, some
investors are now betting that the currency will weaken in the next year,
although that also looks unlikely.
A stronger yuan would give the rest of the world a
competitive advantage in trade and boost Chinese consumers' spending power. But
Beijing is worried that it would hurt its own exporters, who are vital for job
creation.
China could also lower interest rates. The People's Bank of
China has raised interest rates five times since October, and could conceivably
unwind some or all of those moves.
However, Beijing seems reluctant to make that move. Premier
Wen Jiabao has insisted that fighting inflation remains the top policy
priority. That suggests the most likely central bank course is a pause, not a
cut.
What China won't do
As long as price pressures are high, China will play
conservatively no matter what the rest of the world might want it to do.
Just as the US Federal Reserve dismissed criticism of its
$600bn bond-buying programme by pointing out that a stronger US economy was
good for the world, Beijing can argue that a stable China is in everyone's best
interest.
Annual inflation was running at 6.2% as of August, well
above Beijing's target of 4%. Five interest rate hikes and nine increases in
bank reserve requirements in the past year have not been enough to cool prices.
Too much money finds its way into the economy through
non-bank lending. Indeed, some economists warn that China's shadow banking
system looks ominously similar to that of the United States before the last
financial crisis - enormous, murky, and loosely regulated.
Flooding the economy with more money through a huge stimulus
package would only make matters worse.
Big questions remain over how the last pot of money was
spent. Beijing encouraged banks to lend freely to government projects such as
railways, airports and roads. Some of the loans have soured, and local
government defaults now pose one of the biggest threats to China's growth.
Local governments liabilities amount to nearly 27% of
China's total annual output, and some economists think as much as a quarter of
that total could end up in default.
If Beijing has to bail out those local governments, its
pockets suddenly won't look so deep, and the rest of the world's problems would
have to wait.
"China's role this time around will be different,"
said Yi Xianrong, an economist at the Chinese Academy of Social Sciences.
"China is suffering a big hangover from what it previously did, which has
created huge risks in the Chinese economy. The role that China can play is
minimal."