As others limp along, China finds way out of recession

WASHINGTON — It's a tale of two economies.

The United States, the world's largest economy, remains mired in recession as do most of its fellow top industrial powers.

China, poised to pass Japan as the second-largest economy perhaps by late this year, recently announced its gross domestic product (GDP) grew by more than 7.1 percent in the first half of this year.

The two countries begin talks today to seek solutions despite tensions over currencies, the U.S. budget deficit and the huge U.S. trade gap with China.

Of the top 10 world powers, China is the only one to experience economic growth in recent months, making it the first major country to emerge from the worst global slump since the 1930s. Many analysts suggest China could help to lead the rest of the world out of the doldrums.

For its part, China hopes the United States and other Western countries also will recover and revive their now-depressed demand for Chinese goods, further buoying the Chinese economy. With recession-shocked American consumers spending less and saving more, however, U.S. officials suggest those glory days for Chinese exporters will not return soon.

Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy Geithner will lead the U.S. side in the two-day Strategic and Economic Dialogue. The talks are the latest in an increasingly high-level series of meetings between the two countries this year that could have significant bearing on the global economy and international environmental policy.

Chinese State Councilor Dai Bingguo and Vice Premier Wang Qishan are expected to seek assurances that the dollar will remain strong and thus protect China's holdings in U.S. treasuries.

"As an important investor, China is deeply concerned about the U.S. economic situation and hopes the U.S. stimulus policy could make effective progress," Zhu Guangyao, China's assistant finance minister, said at a recent news conference.

For years, China's treasury purchases financed America's buying binge, which included Chinese exports. China also helped make possible the low interest rates and loose credit that paved the way for the U.S. housing bubble.

"Our message to the Chinese is going to be, 'If you want to achieve your growth objectives, you're going to have to find a different way of doing it than through export-led growth,' " a senior Obama administration official said of the talks.

Meanwhile, China stands out as a case study in how government economic stimulus can work.

Fierce debates have emerged over whether President Obama's $787 billion stimulus, passed by Congress in February, is having much impact. It was designed to help create jobs; U.S. unemployment is rising at a steep pace and the economy is still shrinking.

By contrast, China's $586 billion stimulus effort, put in place in November, has been hugely successful by nearly all accounts. The package freed up massive public-works spending and made bank loans more available, spurring a huge increase in building and purchases of cars, homes and other goods.

Why did China's stimulus work when the U.S. version was slow to kick in?

For one thing, China had many of the programs, including public-works projects, in the planning stages for two or three years, so the Chinese had a head start when the downturn hit. China also didn't have to go through the tortuous gyrations that the Federal Reserve and Treasury did to inject money into U.S. banks in hopes of persuading them to resume lending.

"Credit was flowing not because Chinese bankers were inherently confident about their economy. Credit was flowing because the Communist Party was telling the banks to lend," said Charles Freeman, former assistant U.S. trade representative for China affairs and now with the Center for Strategic and International Studies.

While exports may not be as much a driver of the Chinese economy as in the past, China is well-situated to benefit in any upturn, particularly because of its reputation for manufacturing inexpensive products, Freeman said. "Cheap goods are relatively in demand in times of economic trouble, and so China is the first and last resort for cheap goods," he said.

For the United States, suffering from a 9.5 percent unemployment rate, the ultimate goal is to help put more Americans to work.

One official said the United States also will seek assurances that China won't resort to what Washington considers protectionist steps. Some in Congress want to punish China for what they see as unfair trade practices that have cost Americans manufacturing jobs.

The Obama administration has filed its first unfair-trade case against China over its restrictions on exports that U.S. manufacturers need to produce steel and other products.

China and the United States are each other's second-largest trading partner. But trade is way out of whack. The U.S. trade deficit with China remains its largest, even though trade overall has been down because of the recession.

The Economic Policy Institute, a union-funded think tank, says China represents a staggering 83 percent of the entire U.S. trade deficit in non-oil goods, up from 26 percent in 2000.

Exchange rates also represent a long-simmering dispute between the U.S. and China. U.S. officials claim China's currency policies overprice U.S. goods there and make Chinese-made goods less expensive in the United States.