Experts don't believe China can save world economy

By Andreas Landwehr Aug 10, 2011, 2:06 GMT

Beijing - The consequences of previous stimulus programmes mean that the Chinese economy will not be the locomotive to drive the world economy in the event of a new global recession, according to experts.

High inflation, a huge property boom and a hidden mountain of debt are the results of the economic stimulus programme followed in the world's second largest economy in the wake of the 2008 global financial crisis.

The injection of billions and a massive increase in the granting of credit boosted the Chinese economy at the time and, as a result, helped the rest of the world better deal with the crisis.

However, experts now warn that China's hands are tied if the world once again falls into recession and the country will not be in a position to ride to the rescue this time around.

'The situation is far less manageable than it was in 2008-9. Then it was possible for China to pull out all the stops and unleash a massive fiscal stimulus,' Barry Eichengreen, economics professor at the University of California, Berkely, wrote in an analysis for the East Asia Forum.

Back then, banks were given a free hand when it came to issuing credit.

'Today Chinese policy makers have less room for manoeuvre,' said Eichengreen.

With inflation stubbornly remaining above five per cent, bank lending needs to be curbed, while policies that could further inflate an already bloated property bubble need to be avoided.

The Chinese central bank has significantly reined in bank lending by raising interest rates five times since last October, while the minimum capital requirements for banks have been lifted on nine occasions.

Despite all these efforts, inflation in July crept up further to 6.5 per cent, the highest level in three years.

There is anger amongst Chinese consumers as a result of a 14.8-per-cent increase in food prices in the last year with the price of pork jumping by 57 per cent.

The huge mountains of debt built up by local governments is also causing concern, with foreign experts fearing that the amount and resultant credit risk is being underestimated.

The debt is estimated to be more than 1.4 billion dollars and US ratings agency Standard & Poor has warned that a third of this credit could be problematic. Moody's put the level of bad loans in the entire Chinese banking system at between 8 and 12 per cent.

Chinese state radio has already commented that the country is paying the price today for the last rescue package, pointing to the increasing debt burden, price rises and dangerously inflated property market.

These problems limit the government's options in trying to boost the economy in the event of another crisis.

A new recession would hit China's heavily export-driven economy hard, and the central bank is no longer in the position to pump billions into the economy in order to stimulate domestic demand to take up any slack.

Consequently, China's economic growth recently dropped to 9.5 per cent, having a knock-on effect on other export-led economies such as Germany, which until now has profited handsomely from China's economic boom.

The Chinese government has exhausted nearly every option available, said Wang Jun, an economist with the China Center for International Economic Exchange.

Wang told the Xinhua news agency that the government has already used nearly all of the monetary tools at its disposal, meaning that it might have an even harder time dealing with a new round of global financial turmoil.