How Much Will China Grow?
Not by Much--Less Than 2 Percent

China will grow by less than 2 percent in 2009. As a highly export-oriented economy, China is critically exposed to any slowing in the global economy. Already in the fourth quarter of 2008, even China's own notoriously deficient economic statistics suggest that the Chinese economy virtually stagnated as China's export markets shrank abruptly.

The global economic outlook confronting China in 2009 will be even more challenging than that in 2008. The International Monetary Fund is now estimating that the major industrialized economies will contract by 2 percent in 2009, or by the most in the post-war period. However, there is strong reason to believe that the IMF is again being overly sanguine about the global economic outlook. Japan's economy is in virtual freefall and deflation has returned; Europe's banking systemis being shocked by the meltdown in East Europe and the global recession is now exposing basic flaws in the euro; and the new U.S. administration has failed to deliver on a sufficiently front-loaded fiscal stimulus package or on a coherent financial market plan that might end the U.S. economy's downward spiral anytime soon.

China's stimulus plan is ambitious, but that will not be enough to protect the Chinese economy from its dependence on the vitality of its senior trade partners.

The optimists argue that even if China's export markets were to collapse or protectionism were to intensify, China has the wherewithal to aggressively use fiscal and monetary policy to pump up domestic demand. What the optimists fail to see is that such an approach is highly unlikely to forestall a massive wave of bankruptcies and a steep rise in unemployment in China's security instabilities whose content remains unpredictable but whose negative consequences on the global economic conjecture can readily be predicted. Admittedly, China's stimulus plan is ambitious, but that will not be enough to protect the Chinese economy from its dependence on the vitality of its senior trade partners--including the United States, Germany, and Japan, which China will continue to outperform, to be sure, but in the very low range of positive growth and probably below a 2 percent range for the year.

Desmond Lachman is a resident fellow at AEI.

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