China seen passing second major stimulus package to jump-start economy

Trying to end slowdown

China passed a $586 billion (4 trillion yuan) fiscal stimulus package in November 2008 to counteract its slowing economy. Previously thought to be an independent, self-reliant economy, China's GDP has been cut in half as a major reduction in consumption in the developed world, primarily in the United States and Europe, has reduced demand for goods manufactured in China. After registering +10% growth for more than three years, China's economy may slow to as low as 5-6%, so says economist David H. Wang, a China expert.

"That 5 or 6% growth is tantamount to a recession in China, and thousands of factories have closed, so the second stimulus package can't occur a moment too soon," Wang said. "China has the benefit of a streamlined policy debate process, where basically, after an economic committee makes its recommendation of what type of stimulus projects to undertake, if Wen approves the plan, it becomes national policy."

Still, Wang said even with the second stimulus package, China's economy will struggle to grow above 6 or 7% in 2009. "China was caught a little behind-the-times by the severity of the export slowdown. It finally cemented in public officials minds the need to broaden its domestic economy and domestic consumption base," Wang said. "China was too dependent on export sales, and as we know, when you're that dependent on exports, when the export revenue disappears, so does the growth."

In 2008, China's GDP totaled $7.8 trillion in purchase power parity terms, trailing only the 27-nation European Union with $14.9 trillion, and the United States at $14.6 trillion, according to Central Intelligence Agency data.

Economic Analysis: China's potential second stimulus package is a much-needed shot-in-the-arm for the east, and for the global economy. Just as significant will be what mechanism China implements to increase demand by consumers at home. One of the major imbalances or errors of the previous global boom was a developing world that was too dependent on U.S. consumption. That model was unsustainable, and U.S. consumers will no longer consume at previous rates. Hence, the next expansion must and will most likely include multiple consumption centers -- in China, Russia, Latin America and in Eastern Europe etc. -- to achieve more-balanced, sustainable global GDP growth.