http://www.nytimes.com/2009/10/23/business/global/23iht-rglobalchin.html?_r=1&ref=asia BEIJING — Unfettered by public opinion, partisan squabbling or parliamentary opposition, Chinese leaders responded swiftly a year ago to the global economic downturn by authorizing a huge fiscal stimulus plan, followed up in short order with a loosening of monetary policy and a surge of bank credit. Related Special Report: Rebuilding the Global Economy: Rebound in India Leaves Some to Struggle (October 23, 2009) Special Report: Rebuilding the Global Economy: In Saving Jobs, Mixed Efforts in E.U. (October 23, 2009) Special Report: Rebuilding the global economy: Lots of Stimulus Money — and Concerns About Where to Put It to Work (October 23, 2009) The stimulus package, announced in November, promised 4 trillion yuan, or $585 billion, in spending over the following two years. As details trickled out, it became clear that public spending on large-scale infrastructure was to be a huge part of the mix. Other recession-struck governments around the world had to struggle to find and fund enough so-called “shovel-ready” projects to stimulate the creation of construction jobs. But China, with countless such projects already on the drawing boards, faced no such dilemma. So many plans, indeed, were already in place for new ports, bridges, water projects, power plants, roads and rail lines, that some critics suggested the package might not represent much new spending after all — a skepticism not diminished by China’s opaque public accounts. Still, new money or not, the construction sites were opened and people went to work. In the first eight months of this year, spending on fixed investment rose 33 percent in nominal terms over spending in the same period last year, according to recent research by JPMorgan Chase. Recent months have seen some slowdown of investment in mining and manufacturing, but investment in railroads continues to soar, notching up a growth rate of more than 103 percent for the first eight months of this year. By the end of this year, China will probably have spent $50 billion on its nationwide high-speed rail network alone. Nearly a year after announcing its stimulus plan, China seems to have weathered the crisis better than most other countries and better than many western economists expected. Prime Minister Wen Jiabao has warned of the potential for continued difficulties ahead and the need to avoid complacency, but things right now could look much worse. The pain of job losses in export-oriented processing industries has been tempered by new infrastructure-related employment. Domestic retail sales have held up, and even the beleaguered export sector has shown signs of resilience. Figures released this month showed that exports totaled $521 billion in the first half of 2009. While that was down 22 percent from the first half of last year, other major economies like Germany, the United States and Japan all saw bigger export declines. And China’s market share rose dramatically in important sectors of many foreign markets. Most significantly, China’s economic growth rate — the object of perpetual political obsession among officials and citizens alike — though off the double-digit highs of recent years, seems poised easily to reach the government’s target of 8 percent for this year. In recent projections, many foreign analysts expect it to exceed that target. According to Yolanda Fernandez Lommen, chief of macroeconomics and economic policy at the Asian Development Bank’s resident mission in Beijing, China is likely to perform even better for the rest of the year. “Traditionally the fourth quarter is the most dynamic in the Chinese economy, so I would say the 8 percent growth rate is guaranteed,” she said. “It’s actually outstanding performance. The stimulus package has played a role,” Ms. Fernandez Lommen said. “I think the government deserves credit for putting it up so fast, and it has been very effective.” Yet, despite growth that is the envy of the world’s other industrial economies, China still faces the challenge of a balancing act. It must carry on with its longstanding efforts to rebalance its own economy, which has depended far too much for too long on exports and fixed-asset investment, and too little on domestic consumption. At the same time, China must restructure to play a different role in a world economy that is itself in urgent demand of rebalancing. In some ways the global crisis could help China achieve these goals. With the decline of global export markets, and the likelihood that those markets will take some time to regain their previous levels, Chinese firms now have an added incentive to focus their efforts on meeting demand in China’s domestic markets, as the government has long been urging them to do. Related Special Report: Rebuilding the Global Economy: Rebound in India Leaves Some to Struggle (October 23, 2009) Special Report: Rebuilding the Global Economy: In Saving Jobs, Mixed Efforts in E.U. (October 23, 2009) Special Report: Rebuilding the global economy: Lots of Stimulus Money — and Concerns About Where to Put It to Work (October 23, 2009) But Chinese consumers have had very rational reasons for restraint, and neither the slowdown nor the government’s response has done much to address them. Because of China’s weak social security system, individuals know they need to save at a high rate as a hedge against their need to cover most of their own health care and retirement needs. When the stimulus was announced, the consensus among Western economists was that it would probably be large enough to have a quick impact, but some wondered whether it was too heavily weighted toward large infrastructure. Frank X. Gong, then head of China research and strategy for JPMorgan Chase, and now vice chairman of J.P. Morgan China investment banking, predicted a huge boost for the cement sector as a result of all the infrastructure spending, but wondered whether the response might have been designed to do more toward lifting domestic demand. “Can all the investments stay focused on necessary infrastructure and building the much needed social welfare infrastructure to boost consumption?” he asked shortly after the fiscal stimulus announcement. Like other analysts, Mr. Gong also worried that the spending surge might lead to a rash of corruption cases, wasteful spending, and poor quality investments. If such problems do materialize, they will take more time to come to light. And even if they do, the government might reasonably consider that an acceptable cost of having taken bold steps when they were needed. Ms. Fernandez Lommen, argues that the stimulus package was never the place to look for remedies to problems like those. China, she said, remains in urgent need of “painful” and “politically difficult” reforms across a wide range of issues, including liberalization of the labor market and financial services. “But you cannot tackle those issues under a rescue package. There was no time, and it would have delayed the positive impact,” Ms. Fernandez Lommen said. “The stimulus package is not a reform package. It is a sort of emergency tool to rescue the economy in a moment of crisis,” she said. In the longer-term rebalancing of its economy, China will need to do more for its vibrant but handicapped sector of small and medium-sized enterprises. Many smaller companies, being export oriented, have been especially hard hit by the global slowdown. But in the government’s haste to respond to the crisis, those companies have largely missed out on its largesse. Numbering around 60 million, China’s small and medium-sized businesses provide half of China’s tax revenues, two thirds of its exports and, according to some estimates, three quarters of its new jobs. But, overwhelmingly privately owned, they tend, unlike large state-owned companies to lack political connections. In a nation where the banking sector is dominated by the state, this has left them with poor access to credit, even in the best of times. Over the past year, the government’s desire to funnel money quickly into the economy has reinforced its tendency to use the established channels of large state-owned enterprises. That, said Connie Zheng, a senior lecturer at the Royal Melbourne Institute of Technology in Australia, has short-changed the small and medium-sized sector despite its central and continuing role in the economy. “The government is still very much focused on large enterprises, especially in the public sector and in the cities, and they have not done much for the ” sector she said. “I would have thought that during the downturn the government would want to give them some money, especially since around 90 percent of them are involved in international trade, but they have been slow to do that,” Dr. Zheng said.