The China Model

While the West slumps, China's economy has quickly sprung back to life. What that does — and doesn't — say about the new economic order

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David Hogsholt / Reportage / Getty for TIME

Unidentified Chinese shoppers wait at a red light before heading towards Plaza 66, a mall in the city’s most exclusive shopping area, West Nanjing Road.

On a steamy saturday afternoon just outside Shanghai, Zhang Yi is in a blessedly cool General Motors showroom, kicking the tires of the company's newer models. He's not there to beat the heat. He drives a small Volkswagen now and wants to upgrade. A middle manager at a state-owned steel company, Zhang has no worries about his job or China's economy. "Things are still pretty good," he says. "I have no problem now affording one of these," nodding toward the array of gleaming new Buicks nearby.

There aren't a lot of places in the world these days where consumers speak with that kind of confidence. With the U.S., Japan and all of Europe mired in the worst global recession in 30 years, China has shown a restorative strength that six months ago many doubted it had. A devastating slump in exports crippled growth late last year, but on the back of a $586 billion government stimulus program — about 13% of GDP, spread over two years — China has snapped back. The economy grew 7.9% in the second quarter and will now probably expand 8% or more this year. Evidence of increasing momentum appears almost every day. Factory production has begun to edge up, in part because Chinese consumers continue to spend money at a healthy pace. Auto sales, helped significantly by government subsidies for small-car purchases, hit an all-time record in April and will easily surpass those in the U.S. this year. Overall, retail sales in China this year are up 16%.

Numbers alone do not capture the sense that the balance of global economic power is shifting eastward. There have been several moments that seemed to crystallize the zeitgeist, none more memorable than U.S. Treasury Secretary Timothy Geithner's speech in June before the best and the brightest at Peking University, the Harvard of China. Not long ago, students there would have been the most respectful and polite of audiences. Yet when Geithner tried to reassure one questioner that China's investments in U.S. government debt were "very safe," the response was perhaps an indication of the onset of a new economic order: the students laughed.

The U.S., the unquestioned leader of the global economy, is now in the midst of a disorienting shift in economic policy, away from the let-it-rip form of capitalism that has guided it for almost 30 years and toward more overt government control and regulation of huge swaths of the economy. No one yet can safely say whether this is wise, but in the U.S. it is certainly the stuff of increasingly fierce debate. No such doubts are evident in China, where the government reacted to the crisis with alacrity and the economy is now responding in kind.

That's why, for global companies like General Motors, China is no longer the future. It's the present. Of the world's 10 biggest economies, China's is the only one that is growing, and it could soon surpass Japan's to become the world's second largest. The Shanghai exchange has soared more than 80% this year, by far the best performance among major markets. Nations that depend on producing commodities, such as Australia and Brazil, have benefited immensely over the past six months as demand from China has driven up the price of raw materials. Helped by trade with China, Asia's export-driven economies are sputtering back to life. Overall, the International Monetary Fund (IMF) forecasts that in the three years from 2008 to 2010, China will, astonishingly, account for almost three-quarters of the world's economic growth. Not surprisingly, China has now become the focus of a world that is looking for a way out of the swamp. As Shanghai-based economist Andy Xie puts it, "Everyone wants to know the same thing: Can China save the world?"

Trading Places
A few years ago, that question — and the notion that China could drive global growth — would have seemed absurd. After all, China's economy was dependent on manufacturing, which was in turn dependent on demand from the U.S., the world's undisputed economic locomotive. But that engine remains sidetracked. The IMF predicts the U.S. economy will contract 2.6% this year. American home prices continue to fall in some cities, while the unemployment rate has soared to 9.5%, the highest since 1983. The U.S.'s much ballyhooed stimulus plan has so far yielded little measurable benefit, save putting some spark back in stock markets. The absence of real signs of recovery has Washington discussing the possibility of yet another round of stimulus spending, despite a ballooning federal budget deficit.

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