China's New Deal: Modernizing the Middle Kingdom

To cushion itself against recession, China is investing in one of the most ambitious public-works programs ever seen

By Simon Elegant/Beijing and Austin Ramzy/Guanling Monday, June 01, 2009
    • Ariana Lindquist for TIME

    Farmer Wei Xinyuan plows his field in the shadow of the Baling River Bridge in Guizhou province.

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    Looking to the West
    Are such huge projects really necessary? China, with its gleaming coastal cities and modern transport hubs, is already the envy of developing countries like India. And from Alaska to Japan, there are plenty of examples around the world of infrastructure projects that owed more to local politicking than to real economic need. Most of China's stimulus spending, critics note, will be supervised by local governments. This will undoubtedly mean that some money will end up lining the pockets of corrupt bureaucrats.

    Yet there are early signs that the massive influx of government spending is already accomplishing its main goal: easing China's economic slowdown, which has been headlined by double-digit declines in exports, thousands of factory closures and the layoff of about 20 million workers. Economic statistics for the first quarter of 2009 were surprisingly positive, leading some economists to conclude that the rate of contraction was slowing and that China might be on the road to recovery. Power-generation and transportation statistics, key indicators of the economy's direction, registered modest increases in March after months of decline. Banks lent money at record levels, investment showed signs of recovery, and auto sales grew nearly 3.9% in the first quarter compared with the same period last year, thanks to subsidies for new-car buyers and lower sales taxes. The results led Wen to conclude that "Chinese government policy has been timely, correct and decisive."

    China, of course, has certain advantages when it comes to managing shifting economic winds. There's no peskily powerful Congress to worry about, for one thing; what the Chinese government wants in the way of policy, it gets. Christopher Wood, chief Asia strategist for the brokerage and investment firm CLSA, says the fact that China's economy is a hybrid of capitalism and a socialist command economy has given the government much greater flexibility to intervene. Beijing more or less ordered Chinese banks to increase lending in response to the global financial meltdown. Wood, a former journalist well known for predicting the bursting of Japan's bubble 20 years ago, says he expects the beneficial effects of China's stimulus spending to continue for three to six months. While other Asian economies are expected to suffer sharp contractions in 2009, CLSA is predicting that China will hit its government-set GDP growth target of 8% this year, following a drop in the first quarter to 6.1%, the slowest annual growth rate since at least 1992.

    But for any recovery to last beyond the end of the year, China's crucial manufacturing and export sector must revive. Otherwise, Wood says, stimulus spending could result in a "skewed outcome": billions of dollars in loans made to artificially boost growth could start to go bad, dragging down China's banks; at the same time, the country would remain saddled with a glut of factories producing a vast surplus of goods no one wants to buy.

    While the stimulus package has risks, it also affords China a chance to rebalance the country's growing wealth. One by-product of China's prolonged expansion is that coastal regions — marked by boomtowns such as Shanghai, Guangzhou, Xiamen and Tianjin as well as their hinterlands — have grown much faster than the country's interior provinces, which have always been poorer. For years the central government has tried various policies to lift western China, without much result. The infrastructure push gives Beijing another chance to address divisive and potentially explosive wealth gaps that have grown between east and west, rich and poor.

    City on a Hill
    These divisions, and the government's push to reduce them, are evident in the southwestern megalopolis of Chongqing. Built on the hilly banks of the Yangtze River, this ancient trading center was the effective capital of China during World War II and today is one of the world's largest municipalities, with a population of 31 million. The brightly lit buildings along the Chongqing riverfront display a cosmopolitan sophistication. But that impression quickly fades as you leave the city for the corrugated hills outside. "In Chongqing, the transportation system and so on are quite developed," says Shen Xiaozhong, deputy director of the city's office of the National Reform and Development Commission. "But go out 30 km from the city — not that far — and the conditions are still pretty poor." Truth to tell, they're bad enough in parts of the city itself, where legions of "stick stick" men line the sidewalks hoping to earn a few dollars carrying goods up the town's steep hillsides, reminding all who see them of China's lingering poverty.

    See 10 things to do in Shanghai.

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