Commentary: Progress Toward Recovery

According to World Bank President Robert Zoellick, the light might be China. In a recent speech, he said the world’s third-largest economy could provide the strength to pull the world out of recession.

“Any forecast in this environment is hazardous, but I think China is likely to surprise on the upside,” Zoellick said while speaking at an economic conference in Montreal this week, according to press reports. “By and large, it has not only been a stabilizing force, but a force that will pull the system” out of recession.

China’s appetite for raw material has been fueling growth in commodity prices, according to a recent report in the New York Times. The country has been stockpiling oil, iron ore, other metals such as zinc, copper, nickel and aluminum as well as agricultural products like canola and soybeans.

The Times has also reported that China’s domestic demand has been making up for sagging exports during the recession. A portion of the consumption is a result of the large stimulus package instituted at the beginning of the year, but personal spending on items such as cars has also contributed to the trend.

Roadblocks to recovery

Significant pitfalls could still threaten China’s contributions to economic recovery. Questions remain over whether the massive amount of credit it is pumping into the economy will not come back to haunt it later.

Beijing has pushed the country’s large state-owned banks to extend loans to small and medium-sized enterprises as part of the stimulus efforts. Lending reached $878 billion at the end of May, according to a Reuters report. Much of this will be used for investment in new growth, but the lending could also end up as nonperforming loans and later destabilize the banks.

Another potential hazard is the threat of protectionism, as Zoellick warned in his comments, noting that it is often a symptom of recessions.

“Right now there is a low-grade fever; it isn’t full influenza, but we need to keep a close watch because as unemployment numbers go up, politicians are under stress and some of them may turn to protectionism.”

As the United States government steps in to rescue the troubled American auto industry, it may come under pressure to block overseas investment. But creating new restrictions now would be counterproductive as the Chinese market is one of the few bright spots for Detroit.

There is still a ways to go before recovery is real, but China can play an important part in getting there, provided we are aware of the potential roadblocks.

Asia Pacific Newsgreat free widgetsWidgetbox