China could be key to our economic recovery


There are still some scary things about this financial crisis.


The IMF estimates that the losses already recognized by banks may be only one third of the final total.


Europe is in bad shape. Banks may need even more help than U.S. ones. And until recently, the German government was denying the obvious need for fiscal stimulus. Many countries of Eastern Europe have already needed IMF support.


One risk which has received little attention until recently is that the U.S. dollar, which has been over-valued for years, might collapse. That could be very disruptive.


These things are not just somebody else's problem. Events anywhere in the world can spread their effects globally.


In Canada, response to the crisis has been slow and hesitant. Due to our low government debt, good financial system regulation, and strong balance of payments position, we are far better able than most countries to do something. But political will seems lacking.


The recent $4 billion Infrastructure Stimulus Fund is a good example. Details were only released April 14, but cities are required to apply by May 1. They need to come up with a third of the cost. Sounds to me as if the feds want to be able to say they have an infrastructure plan, but avoid spending money. They can just blame the cities for not taking up the offer.


Another example is the cuts recently made to National Research Council funding. It's great to look for new “shovel-ready” projects to fund, but why then cut something that's up and running and doing something useful? Why throw those people out of work and create more uncertainty in those who are left?


South of the border, things are looking up a bit. The U.S. certainly deserves the blame it gets as chief author of this crisis, but the decisive, innovative policies coming from the Federal Reserve now are one big hope for ending it.


However, our best hope may be China.


Back in November, while Canadian leaders played prorogue-the-parliament, China launched a huge stimulus program. It was close to 15% of its GDP, while most countries are only contemplating stimulus plans around 2% of GDP. That is now taking effect. More spending is possible.


Subsidies were used to help rural, poor people buy appliances and cars. The health care system is getting a major boost. Plus there was lots for infrastructure spending.


In March, output of major industrial firms jumped 8.3% on an annualized basis. Investment in fixed assets in cities rose 30% annualized.


Besides stimulating its own economy, China has been using its strong position to make purchases abroad. These will benefit China, but they are also acting as helpful boosts to the whole world.


China has made deals worth tens of billions of dollars recently in Iran, Brazil, Russia, Venezuela, Australia and France (Washington Post.) These deals help secure strategic supplies of minerals and oil. It is also stockpiling metals from both foreign and domestic sources while prices are low.


China does not need foreign demand for its products nearly as much as in the past. Having developed its industrial capabilities to such a high level, it can now stimulate domestic demand to buy more of its own products.


That can be done by boosting its money supply, which is exactly what a huge stimulus package financed by borrowing from its central bank will do. Look for living standards to rise rapidly.


Canada's sleepy response to this crisis means needless unemployment, but I still hope it won't get too bad. We are a small country, and what happens here is bound to have a lot to do with events elsewhere. Perhaps China can become the big engine which will pull us and the rest of the world out of the ditch.


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