This Giant Isn't Sleeping

It’s now widely believed that the global recession is coming to an end, but the path out has been far from typical: This time around, China, not the U.S. has led the global recovery. With its $600 billion stimulus package and with banks lending with abandon, China has become the engine of global manufacturing and industrial activity. Its demand for commodities, especially copper and iron ore, has driven up prices, and its domestic market has been a rare source of strength for American companies ranging from Caterpillar to Intel, General Motors to Procter & Gamble.

But even after a decade of robust and unexpected Chinese growth, investors and economic analysts still focus on when and how the Chinese miracle will end. It’s not that anyone deeply questions the short-term reality of China’s strength, but no one seems quite able to believe that the locus of the global system has in fact shifted. When global stock markets swooned at the beginning of September, the commentary was abuzz with talk of Asian contagion and the cascade effects of a sharp pullback in Chinese equities. Noted Asia analyst and former strategist for Morgan Stanley Andy Xie announced that, having fallen more than 20 percent in August, Chinese stocks could plunge another 25 percent. His reasoning? China’s economic recovery is likely to stumble badly when the central government attempts to constrict the flow of easy credit. Even in China, when Premier Wen Jiabao cautioned Chinese citizens in late August for being too “blindly optimistic” about China’s economic recovery, that was taken both in China and abroad as further proof that the heady run in China was about to hit a wall. Wen then repeated these concerns to an audience of the World Economic Forum in Dalian on September 10.

All this skepticism is much more than a forecasting problem. China’s economy is showing no signs that it’s about to collapse or even contract. Growth figures have been accelerating, from perhaps 5 percent at the beginning of the year toward 10 percent now. While many question the recipe that China has followed, the results speak for themselves. The problem is that too many are convinced that the growth is a house of cards. It’s a mindset that goes back many years and that has many dangers.

At almost any given point in the past decade, economists and strategists were convinced that good China news was simply a prelude to bubbles and shattered dreams. In part, those beliefs were an outgrowth of past experience with “hot” emerging economies, many of which had succumbed to the runaway inflation that invariably accompanied turbo-charged expansion. The economies of Latin America in the 1970s and of Southern Asia in the late 1990s were taken as harbingers of what China risked, and the fact that so much of China’s growth has been fueled by state-spending channeled through banks to projects of dubious merit was seen as a critical weakness that would end with a banking crisis followed by economic contraction. This doubt was also fueled by a series of false starts in China in the 1980s and early 1990s: China suffered along with the rest of Asia during the currency crisis in 1998, and banking reforms inside of China during those years led to some periods of much slower activity.

Those slowdowns did not seem to have long-term consequences, though. China has produced more growth over the past 25 years than any country, ever (averaging more than 9 percent a year). And after stalling in the fall of 2008 and in the early months of 2009 along with the rest of the world, China has been growing at an astonishing rate in the past six months--manufacturing has been expanding, exports have been surging (more than $20 billion a month to the United States alone), property prices and activity have soared, and stocks are on fire. Interior cities have replaced the coastal provinces as the engine of growth, and that process has barely begun.

But China’s resilience does not seem to have convinced analysts to consider the possibility that China may be on a more stable trajectory today. In the past few years, among those talking down China’s economy has been Stephen Roach, now chairman of Morgan Stanley in Asia and one of the most influential voices in the highest circles of politics and finance. Since 2002, Roach has relentlessly assailed the China growth model; this year he has emphatically warned that China’s response to the financial crisis could be setting the world up for another round of financial shocks next year. Others have echoed those concerns, ranging from Harvard pundit Niall Ferguson to New York Times columnist Paul Krugman. China skepticism is embedded in Wall Street as well.