Even China can't live on stimulus alone

No country can live on stimulus alone – not even China. While there are signs that a Rmb4 trillion ($584bn) fiscal fuel injection is taking effect on the world’s third-largest economy, China-watchers are starting to worry about what happens when the spending spree comes to an end. Recent trade data gives more cause for concern.

China’s latest figures tell two stories. The 30% fall in the trade surplus, to just a third of its record high last November, paints a picture of a country sucking up more stuff to shore up infrastructure, build new roads, schools, bridges and railways. Exports, which dropped more than the previous month, show a country whose customers are still on strike.

Many economists – call them the “green-shootists” – are focused on the former. Other big numbers back up their optimism. Investment in fixed assets grew by almost a third in April. Money supply, electrical production, house prices and producer sentiment all suggest China is at least stabilising.

But green shoots can be more nurture than nature. China remains an economy pulled and pushed into life by government intervention. The source of sustainable growth – the inhabitants’ desire to spend money – is still lacking. Private consumption remains a small third of Chinese GDP, and consumer prices are actually falling.

While waiting for its consumers to spend more, China seems to be banking on “Plan B” – bailing out the US, its biggest customer. February’s data showed China hoovering up 22% of new US government debt – three times the proportion a year ago, though less than in January. Its overall share of US government debt may be falling, but in absolute terms, it’s still a buyer.

The Chinese authorities have a tricky path to negotiate. To protect the value of their $2 trillion of foreign exchange reserves, they warn about the risks of Western “policy mistakes”. But those mistakes are the very same huge government deficits China is doing so much to finance. Better hope consumers somewhere – China or the West – start spending before China runs out of holes to dig, or what looks like recovery could prove a counterfeit.