A year on, China's stimulus postpones its problems

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - Exactly a year since it unveiled a 4 trillion yuan ($586 billion) stimulus package and switched to an easy monetary policy, China is basking in the success of its aggressive response to the global financial crisis.

The government's 8 percent growth target for the year -- derided by some prominent economists as fanciful well into 2009 -- is in the bag. And the solid consensus is that growth will be stronger, possibly a lot stronger, in 2010, when China is set to overtake Japan as the world's second-largest economy.

China is contributing more to global growth than either the United States, the euro zone or Japan and its surging imports have limited the slide in global trade, according to the World Bank.

"There's an inexorable shift toward East Asia, particularly toward China," said Vikram Nehru, the bank's chief economist for the region. "China is becoming a central part of the global economy."

China, in short, is riding high. But could it also be riding for a fall?

After all, the imbalances at the heart of China's mode of development -- too much investment, too high savings, too little consumption -- seem to fit the dictum of late American economist Herbert Stein to a T.

"If something cannot go on forever, it will stop," Stein's Law says. Exhibit one: the prolonged U.S. credit binge that begat the crisis.

STEADY AS SHE GOES

As was the case with the United States, the overarching risk for China is that it keeps policy too loose for too long. Yet Finance Minister Xie Xuren again signaled at the weekend that China is in no hurry to shift gears.

"There are still many uncertain factors in the current global economic recovery, so all countries should maintain the continuity and stability of macroeconomic policy," Xie told a Group of 20 meeting in Scotland.

Another huge wave of bank-financed investment is guaranteed for 2010 because the government is only half-way through its two-year stimulus package. You don't start building a railway and leave it half-finished.

The boom in capital spending has worked as intended. Investment contributed 7.3 percentage points to the 7.7 percent increase in gross domestic product over the first nine months.

China has vast infrastructure needs, but there can be too much of a good thing. Bank lending has grown by a third in the past year to finance the investment spree. Stein would be raising his eyebrows.

"It is now time to begin slowing the pace of rapid credit growth," said Tarhan Feyzioglu from the International Monetary Fund's office in Beijing.

Central banks usually apply the brakes to ward off inflation. Not in this case. China's underlying price pressures are mild.