China Rising

The big question facing the U.S. and the rest world as they emerge from the recession is what role China will play in the new world economic order. A clue to the answer is the nation’s growth projections for 2009. As the U.S., Europe, and Japan struggle, analysts have revised their forecasts for China down to a mere 6.5 percent.

Those would be heady numbers for the U.S. during the most robust economic times. The fact China is expected to grow by this amount during a global recession is yet another shot over the bow of the U.S. economic ship.

Where is this growth coming from? It won’t be the export market, despite its historic importance in fueling growth that fed a burgeoning middle class. The 6.5 percent growth rate will be achieved from wealth creation in the domestic Chinese economy. We are likely to see the Chinese economy become a global juggernaut as the export-led economy of the 1980s and 1990s yields to the increasing demand in the domestic economy fueled by a rising middle class and greater industrial and services capabilities.

As the World Bank notes in its March 2009 China Quarterly Update:

China is a relative bright spot in an otherwise gloomy global economy,” said the World Bank’s country director for China, David Dollar. “Shifting China’s output from exports to domestic needs helps to provide immediate stimulus while laying the foundation for more sustainable growth in the future.”

He said that subdued prospects for the global economy—and thus for exports—increased the importance of boosting domestic demand and domestic consumption, which is also key for rebalancing. Recent initiatives to stimulate consumption and improve people’s livelihoods by expanding the government’s role and spending on health, education, and social protection measures are welcome and there is room to do more.

In short, China will likely be the dominant economic player once the dust settles after the global recession abates.

For an in-depth analysis of the underlying macroeconomic indicators for the Chinese economy, also take a look at John Makin’s analysis “Can China Keep Growing?” published by the American Enteprise Institute in May.