Years from now, China's embrace of a massive fiscal stimulus, announced this
week, will be seen as a far more important marker of the country's emergence as
an economic superpower than even the successful hosting of the 2008 Summer
Olympic Games.
This two-year, US$600 billion fiscal stimulus - equal to a stunning one-sixth
of China's entire gross domestic product - focuses primarily on the
construction of economically critical infrastructure, such as rail and energy
networks and politically critical infrastructure, like low-income housing and
healthcare. The historic importance of China's "New Deal" is evident in at
least five factors.
First, China's swift action aptly illustrates how this putatively communist
country can flexibly embrace the kind of mainstream
Keynesian economics that has kept the capitalist world (mostly) in prosperity
since the end of the Great Depression. It's pitch-perfect fiscal policy.
Second, in a supreme irony, China has acted far more quickly and decisively
than the United States, with the students now teaching their former mentors.
Indeed, Chinese officials, many of them schooled in US universities, seemed to
have grasped far more quickly than US officials like Federal Reserve chairman
Ben Bernanke the futility of relying solely on interest rate cuts for rapid
recovery.
In particular, businesses won't invest, no matter how low interest rates go, if
the recession remains. Nor will lower interest rates entice consumers to buy
big-ticket items such as cars and houses if they are worried about their jobs
and shrinking stock portfolios. Chinese officials have grasped this point, even
as European officials have thus far rejected fiscal stimulus and US officials
continue to quibble over the size and timing of any package.
Third, China's fiscal stimulus package puts a powerful exclamation point on the
tightly woven interconnectedness of the world's major economies. While China
continues to run large trade surpluses with the US and Europe, it is equally
true that exports to China by American, European and even Asian countries
constitute an ever-increasing component of economic growth.
In this global trade, countries like Germany, Japan and the US provide
sophisticated capital equipment for China's "factory floor". As China expands
its infrastructure, companies like Hitachi and Caterpillar likewise benefit
from increased sales to China.
Fourth, the focus of China's fiscal stimulus particularly on infrastructure
illustrates a sophisticated understanding - seemingly lacking in the United
States - of what is necessary to build a strong economy. In its next stage of
development, China's rail system must far better serve the inland areas of
China where large pockets of rural poverty and high unemployment persist,
despite three decades of robust growth. In fact, while the coastal areas from
the Pearl River Delta up to Dalian have prospered, much of inland China remains
impoverished. Swiftly developing better roads and rail and a more reliable and
extensive electricity grid and water system is just what the country needs.
Fifth, China's New Deal will act as a powerful stimulus for domestic demand.
Today, the Chinese economy is far too heavily dependent on export-driven
growth. By stimulating domestic demand, China will not only better insulate
itself from the vagaries of global trade. Rising domestic demand should also
help reduce trade frictions that have arisen because of the large trade
surpluses China runs with Europe and the US.
Finally, China's fiscal stimulus may also prove to be the beginning of the end
of China's willingness to finance the budget and trade deficits of the United
States.
For almost a decade, China has recycled many of the dollars it has earned
through its export trade back into the US bond market. This has kept interest
rates low in America and allowed the American consumer to spend far beyond his
or her means.
Now, however, China is going to need its foreign reserves and export earnings
for domestic purposes. That should certainly mean fewer dollars available for
recycling back to the US. In this way, China's fiscal stimulus may act as a
significant constraint on America's own ability to successfully implement its
own fiscal stimulus - even as China uses Keynesian policies to eclipse the US
as the world's reigning economic superpower.
Peter Navarro is a professor at The Paul Merage School of Business at the
University of California-Irvine, a CNBC contributor and author of The
Coming China Wars. www.peternavarro.com.
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