Growth returns to China economy but not to US

WASHINGTON: It's a tale of two economies, China and the United States.

The United States, the world's largest economy, remains mired in recession as do most of its fellow top industrial powers. China, meanwhile, has returned to growth.

Economic and strategic cooperation between the two world economic superpowers tops the agenda as top officials from both countries hold a two-day meeting in Washington, beginning Monday.

China, poised to pass Japan as the world's second-largest economy perhaps by late this year, recently announced its Gross Domestic Product grew by more than 7.1 percent in the first half of this year.

That puts it alone among the top 10 world powers whose economy has expanded in recent months, making it the first major country to emerge from the worst global slump since the 1930s. Many analysts suggest that China could help to lead the rest of the world out of the doldrums.

For China's part, it hopes the U.S. and other Western countries will also recover and revive their now-depressed demand for Chinese goods, further buoying the Chinese economy. U.S. officials, however, suggest that, with recession-shocked American consumers spending less and saving more, those glory days for Chinese exporters will not return anytime soon.

China stands out as a case study in how government economic-stimulus can work.

In the United States, there are fierce debates over whether President Barack Obama's $787 billion stimulus, passed by Congress in February, is having much impact. Designed to help create jobs, U.S. unemployment continues to rise at a steep pace and the economy is still shrinking.

By contrast, Beijing's $586 billion stimulus effort, put in place last November, has been hugely successful by nearly all accounts.

It freed up massive public-works spending and made bank loans more available, spurring a huge increase in Chinese construction and purchases of cars, homes and other goods.

If anything, some economists suggest the Chinese stimulus may actually be working too well, threatening to overheat the Chinese economy. That raises concerns that the flood of easy money will cause inflation and set the stage for the same kind of housing-credit "bubble" that triggered the U.S. financial meltdown.

Why did China's stimulus work when the U.S. version was slow to kick in? For one thing, China had many of the programmes, including public works projects, in the planning stages for two or three years so they got a head start once hit last year by the global downturn.

China also didn't have to go through the tortuous gyrations that the Federal Reserve and Treasury did to inject money into U.S. banks in hopes of getting them to resume lending.

"Credit was flowing not because Chinese bankers were inherently confident about their economy. Credit was flowing because the Communist Party was telling the banks to lend," said Charles Freeman, former assistant U.S. trade representative for China affairs and now with the Center for Strategic and International Studies.

While exports may not be as much a driver of the Chinese economy as in the past, China is well situated to benefit in any upturn, particularly because of its reputation for manufacturing inexpensive products, said Freeman. "Cheap goods are relatively in demand in times of economic trouble, and so China is the first and last resort for cheap goods," he said.

In addition to better economic cooperation, Beijing is also Washington's most important partner in efforts to discourage or contain North Korea's nuclear ambitions.

Still, the U.S.- Chinese relationship isn't all rosy.

There remain security concerns as China bulks up as a military superpower as well as an economic one.

And there is still much trade friction between the two countries.

Many in Congress and in organised labour still view China warily as a fierce competitor for U.S. manufacturing jobs.

"New opportunities in President Obama's new green economy will go to big players like GM and to businesses in China, where the government understands global commerce is played by rules of prison football," said Peter Morici, a business economist at the University of Maryland and former chief economist at the U.S. International Trade Commission.

"China has more than 100 million rural underemployed workers who, if moved into factories, could replace every manufacturing job in the United States, Western Europe and Japan," Morici said.

China and the United States are each other's second-largest trading partner. But the trade is way out of whack. The U.S. trade deficit with China remains its largest, even though trade overall has been down because of the global recession.

The Economic Policy Institute, a union-funded think tank, says that China represents a staggering 83 percent of the entire U.S. trade deficit in non-oil goods, up from 26 percent in 2000.

There is also a long-simmering dispute between the U.S. and China over exchange rates. U.S. officials claim China's currency policies end up overpricing U.S. goods there and making Chinese-made goods less expensive in the U.S.

And, as the largest holder of U.S. debt - mostly in the form of Treasury bonds - Beijing holds vast economic leverage over the United States. Suddenly selling those Treasurys or significantly reducing its debt holdings could send shock waves through the global financial system and make it harder for the U.S. to finance its mushrooming debt.

Most economists believe China is unlikely to make any such moves, because it would reduce the value of its own vast holdings in Treasurys. But Beijing might slow down its purchases of Treasurys and other dollar-denominated investments, complicating efforts for the United States to finance a budget deficit expected to surpass $1.8 trillion this year and a cumulative national debt approaching $12 trillion.

Also, there's one area in which China has now surpassed the U.S. and remains the world leader, even if it's hardly an honour. It is now the world's largest carbon emitter.

U.S. policymakers recognise that costly steps taken by Western nations to reduce pollution to help control global warming will mean little if China, with its population of 1.3 billion people, does not join in the effort.

But so far, the U.S. has been unable to persuade China to work to lower its emissions. China argues with conviction that it has a right to develop rapidly in hopes of attaining Western living standards and that its per capita pollution remains a fraction of that in the U.S. It also claims to have made great recent strides in energy efficiency and cleaning up coal plants.