By Martin Wolf 2009-09-15 copy from Financial Times
China has emerged as the most significant winner from the financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8 per cent in 2009. Who now dares to do so?
Cushioned by its more than $2,100bn (€1,440bn, ￡1,260bn) of foreign currency reserves, huge trade and current account surpluses and a robust fiscal position, Beijing has been able to deploy all its levers over the financial system and the economy.

Meanwhile, as one senior Chinese participant at the World Economic Forum's annual meeting of “the new champions”, in Dalian, noted, “the teachers have made big mistakes”. Indeed, any visitor to Asia will recognise the west's reputation for financial and economic competence is in tatters, while that of China has soared. The wheel of fortune is turning.
Three immediate questions arise. How has China responded to the crisis? Is its resurgent growth sustainable? How far will its recovery help the world economy?

The answer to the first question is: astonishingly. According to data reported at the end of last week, industrial output expanded 12.3 per cent in the 12 months to August, up from a 10.8 per cent increase in July. This is the fastest growth for a year.

Behind this is growth of bank credit at close to 30 per cent, year-on-year, since March 2009. It is no surprise, then, that fixed- asset investment has also been growing at over 30 per cent, year-on-year, since March and by 33 per cent in the year to August. Year-on-year growth for the second quarter of 2009 was 7.9 per cent, up from 6.1 per cent in the first quarter. Third-quarter figures seem sure to be higher still.

The expectation now is that China will achieve the 8 per cent target by a comfortable margin. In February, March and April of this year, the consensus forecast of China's growth was “only” 7 per cent. By August, this was up to 8.3 per cent, with a further 9.3 per cent expected in 2010.

Is this growth surge sustainable? In a word, yes. Inevitably, the torrid growth of bank credit and money is spilling over into asset prices, particularly equities. But there is little danger of excessive inflation in an economy with an appreciating currency, fully embedded in a world economy still threatened more by deflation than by inflation, at least in the near term. Moreover, the government is solvent. As premier Wen Jiabao noted in Dalian, “we . . . kept budget deficit and government debt at around 3 per cent and 20 per cent of the GDP respectively”. Should bad loans increase, China is well able to recapitalise its financial system. Concern should be with whether the growth pattern is desirable. In his speech, Mr Wen stressed the breadth of the stimulus package. But its driving force remains: fixed investment. This carries three risks: it is likely to exacerbate excess capacity, generating a need for still greater stimulus spending or a surge in exports; it may prove less than ideal for job creation; and may thwart a shift towards a more consumption-driven economy.

Finally, however successful China is in promoting domestic demand, it will not be the locomotive for the world economy. True, China's merchandise trade surplus has indeed been narrowing: it was $35bn in the second quarter, 40 per cent lower than a year earlier. China's current account surplus is also shrinking: it may be down to 6 per cent of gross domestic product this year, from 11 per cent in 2007.

Yet, since it still only generates some 8 per cent of world output, China is too small to act as the world's locomotive. Even halving its external surplus would add only 0.4 per cent to aggregate demand in the rest of the world.

China's response to this crisis is significant. It has prospered, while advanced countries floundered. China has noticed. So must its partners.