Hey, Small Spender

Of course, the government can always spend more. Just look what it's done in Shenzhen, a Pearl River Delta city, 60 miles away. Thirty years ago, it was a paddy field. Then, Deng Xiaoping decided to turn it into a manufacturing center, which today has an economy nearly half the size of Hong Kong's. Most recently, the government announced that China's version of the NASDAQ will be based there, spurring more new development. Many of the hyper-air-conditioned shopping malls, mock-Disney weekend resorts and nonsmoking coffee bars there were built by OCT (Overseas China Town), one of the earliest government-owned real-estate operations. Since 1985, the company has developed $8.7 billion worth of real estate. Still, on a recent evening, both Western and Chinese chain restaurants were nearly empty.

China has successfully executed this sort of stimulus strategy before—during the Asian financial crisis of 1997–98, and also after the dotcom bust in 2001. But in both those cases, government money was a Band-Aid, meant to buy time while the global economy (and exports) recovered. It worked well then, but this time around, things are different. There are signs of economic recovery in the U.S. and, to a lesser extent, Europe, yet Chinese exports to those markets are still dropping. That means that jobs for the 20 million Chinese workers who have been laid off may not come back, either. UBS bank estimates that the ranks of the unemployed may grow by another 15 million this year.

Optimists point to Beijing's power of the purse. "The Chinese Communist Party is now the world's most liquid financial institution; there are no fiscal constraints," says Andy Rothman, a respected China bull at CLSA in Shanghai who predicts 7 to 9 percent growth next year. Most economists agree that autocracy has its advantages in the midst of a credit crunch, since there are no political or legal obstacles to spending. As an executive at one of China's largest state-owned banks puts it, "The government told us to lend—so we did!"

China is beginning to create a social safety net, which would give people more confidence to spend instead of save. A few months back, Beijing passed a $124 billion national health-insurance plan, to be delivered over three years. Yet as Morgan Stanley Asia chairman Stephen Roach points out, that's less than 50 bucks a head in China: "just puny." Meanwhile, China's social-security fund has only $82 billion under management, less than $100 per worker. Economists believe the number should be doubled, and that China could afford to do it. Yet Beijing has been talk-ing about bolstering the social safety net since 2006, with little action. Even the Chinese are skeptical about Premier Wen Jiabao's boast to deliver universal health care by 2011.

Of course, increasing affluence would also help encourage consumer spending—the per capita GDP in China is still only $2,000. But that would necessitate moving away from low-end manufacturing toward producing global Chinese brands. Right now most exports are merely assembled in China rather than designed there, which means most of the profit—and the big salaries that would support shopping sprees—still go abroad. Throughout Guangdong, officials and factory bosses alike are working toward designing and producing more sophisticated finished goods, but the statistics tell a different story. Some 60 percent of production in the region is still low-end component assembly. So until China becomes an advanced export power, most of the economic green shoots will be pushed up by the state.

© 2009