China's Stimulus Package Boosts Economy

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L) head of China research, Stephen Green. However, many believe such a lending bonanza could lead to higher levels of nonperforming loans further down the line.

With more than $1.95 trillion in foreign reserves, the central government can afford to open its coffers, too. Earlier this month, Beijing announced it will spend $125 billion to build hospitals across China, as well as to expand medical insurance to cover 90% of China's 1.3 billion people by 2011. The government has also announced a significant expansion of its pension program. Since the global recession is hammering China's exports (they fell 20% in the first quarter of 2009), economists say the country must rely more on consumption to drive economic growth. And to boost consumer confidence, the government needs to provide better medical care, more secure pensions, and higher-quality schools, though many say it could take a generation before the Chinese abandon their penurious ways. Consumption in China now only makes up some 37% of GDP, compared with 70% in the U.S. "The government needs to carry out reform to unleash potential demand and turn it into purchasing power," says Xu Xiaonian, a professor of economics and finance at the China Europe International Business School in Shanghai. That will "get people to spend money instead of saving it."

For all the hopeful signs, many economists worry all the Chinese spending isn't helping much. As in years past, they say, the vast majority of lending is being tapped by well-connected state enterprises rather than more commercially minded and job-creating small and medium-size companies. And given the speed at which Beijing has issued new financing, there are also fears that inevitably money will be lost to the inefficient pet projects of local governments. Many economists also think a big portion of the stimulus money is flowing into stock market and property speculation rather than the infrastructure and social welfare benefits necessary to spark a lasting economic recovery. "A short-term stimulus package is not the same thing as a long-term development strategy," cautions Fan Gang, director of the Beijing-based National Economic Research Institute China Reform Foundation.

Roberts is BusinessWeek's Asia News Editor and China bureau chief. With Huang Zhe in Beijing

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