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The Stimulus Is a Bust in China Too

 

The Stimulus Is a Bust in China Too

The conventional wisdom is that China saved its economy with a big government "stimulus" package.  But after binging on debt to finance wasteful construction projects, the country faces an inflationary hangover.

Reports the Los Angeles Times:

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. China splurged on Australian iron ore, Chilean copper and Saudi Arabian oil to fuel its construction boom. While the U.S. economy was mired in recession, with negative year-over-year growth in gross domestic product in 2008 and 2009, China's economy expanded by more than 9% annually over the same period.

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.

Meanwhile, the nation's debt levels have reached new heights. A national audit released in June found outstanding loans to local governments, among the biggest players in the building binge, amounted to $1.65 trillion, or nearly a third of China's GDP.

 

The good times are not likely to go on forever, and when the bust comes, the Communist Party might find itself facing a stiff political challenge.  After all, the regime long ago lost its so-called Mandate from Heaven.  

The only current legitimacy possessed by Beijing's authoritarian elite comes from continuing economic growth.  Slow or stop the economy and the party loses any argument for its continued rule.  And then things could get really interesting.  Revolution Part II, anyone?


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