Can China's expansion pull the rest of us out of recession?

China's economic recovery is underway, but can the world's third largest economy drive both an Asia hemisphere rebound and help jump-start the U.S. economy?

According to Xinhua, China's state news service, China's economy grew 7.9 percent in the second quarter, good for a 7.1 percent GDP gain in the first half of 2009. This jump represents robust growth for an emerging market economy, but it also follows a quarter in which China's economy grew at its lowest rate in about a decade. China's truly giddy-growth this decade, prior to the global financial crisis, propelled an Asian boom: close trade partners fed commodities and raw materials to China, which returned manufactured goods.
While China's position as a regional economic hegemon is undisputed, it still isn't clear if the country can lead a global recovery. In fact, the country's lower growth rate, post-financial crisis, has some economists and analysts questioning whether China's spin-off affect will be as large during the next economic expansion.

Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada, says China is no longer the proverbial 800-pound gorilla in the room, but it remains a gorilla. "China cannot save the world by itself, but its recovery is a definite positive," Jackson told Bloomberg News Friday. "China has a lot more control over how its banks do business and they were in a lot stronger position than U.S. banks to implement policy stimulus."

More significantly, China's stimulus package is working. This is due in no small part to its totalitarian political structure: as economist Andrew Hill noted, the country's comparative ease in dealing with the global financial crisis and ensuing global recession speaks to its inherent advantages over economies rooted in democracies. "Once it became clear the slowdown was demand-based, and that substantial stimulus would successfully counteract the slump, it literally took only two or three weeks for [China's] leaders to determine the fiscal stimulus' most beneficial components, and bingo - a $586 billion [4 trillion yuan] stimulus package appeared," Hill said. "In most western democracies, it took 3-4 months, and what we're seeing now is the benefits of China's rapid deployment of fiscal stimulus."

However, Hill agreed that China's low mortgage-backed securities losses also put its banks in a better position to provide credit and facilitate commerce than its U.S. and E.U. counterparts. "China's banks were and are more liquid. Of course ... the operational line between China's banks and the Chinese government is pretty vague. At the end of the day, the banks are still extensions of the Chinese government," Hill said.

Even with an effective, responsive fiscal stimulus working its magic and a credit market holding its own, it is still not clear if China's expansion can lift Asia out of recession and serve as a growth engine for the United States. David H. Wang, an expert in China's economy, told DailyFinance Friday that the answer will hinge on China's middle class and how much more China's culture evolves, as it assimilates itself into the worldwide economy.

As Wang puts it, "Given the long-term urbanization trend, we know that China's middle class and working class will continue to grow, so the scale is there to be a force in consumer product consumption. Historically, however, the savings rate has been very high, in the 20-25 percent range. But I expect that to decline as Beijing seeks a more self-sustaining domestic economy," Wang said. "I expect consumption of electronics good, computers, cell phones, laptops, home entertainment systems and leisure goods and the like to advance at double-digit rates. Businesses will also increase purchases of western machinery at strong rates, so there is reason for optimism. China will contribute significantly to the U.S. GDP growth rate in the next expansion."

One of the structural imbalances of the previous global expansion lay in the fact that global growth was disproportionately driven by growth in the U.S. GDP. As many investors are now aware, much of that expansion was unsustainably driven by home equity loan and mortgage debt-fueled consumption. The United States has since entered the "frugal consumer" era, which means that consumption has to shift to other economic regions. Emerging markets like China, India, Brazil/Latin America and Russia/Eastern Europe are particularly poised to pick up the slack. With the above in mind, signs of a strengthening Chinese economy with increased consumption of foreign goods and broadened cultural ties to the west bodes well: along with Asian economies, the United States may experience tangible demand from China during this expansion, a welcome sight.
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