Can China save the world?

On the edge of the Yellow Sea, bulldozers at Dalian’s sprawling new port plough the ground, paving the way for a second iron ore transport line.

It will carry shipments of imported ore from China’s northeastern coast to steel mills in the interior. The air is dusty from mountains of black ore waiting to be taken away.

The construction is part of the port’s plans to invest more in its infrastructure to handle iron ore and oil.

China’s 4tn yuan ($580bn, £352.7bn) economic stimulus package is driving demand for raw materials.

The iron ore that passes through Dalian Port is from Australia, Brazil and Canada. Recently, it has started to receive shipments from Mauritania and other parts of Africa.

The port is also building a huge oil tank with China National Petroleum Corporation, the state-owned firm that controls oil major PetroChina. Total capital investment in 2009 will be between $120m and $150m.

Slowdown

During a tour of facilities still under construction, senior manager Xu Shengke admitted that, overall, business had slowed due to the economic crisis. Last month, the port’s Hong Kong-listed unit reported a 49% drop in profits in the first half of 2009, largely as a result of a slump in global trade.

“The financial crisis has definitely impacted us. But as you can see, our investment plans have not been affected at all,” Mr Xu said. “Our expansion is part of a broader national strategy.”

In July, China’s State Council elevated a plan to develop a coastal economic zone and international shipping centre around Dalian to a strategy of national importance.

As part of that plan, construction on a $10bn railway linking Dalian with the northern city of Harbin has been brought forward by two years. A further $1.5bn worth of investment in other railways has been announced.

Infrastructure investments – some huge in scale – constitute the main part of China’s reaction to the financial crisis. In classic Keynesian fashion, Beijing has been spending its way out of the crisis.

Stimulus package

Investment of $580bn was announced in November 2008, but many experts believe the real figure will be much higher. Chinese banks collectively lent a record $1tn in the first half of 2009, but they have recently started to curb lending.

State-owned companies – including Dalian Port – have been the main beneficiaries of the stimulus measures, often in the form of cheap, readily-available loans.

At last week’s World Economic Forum, hosted by Dalian, the world’s business elite debated the implications of China’s response to the economic crisis.

Some believe the stimulus package will help China overtake the United States as the worlds biggest economy by 2030.

“Can China save the world? No, but it can help,” said John Zhao, chief executive of Hony Capital, one of China’s best-known private equity firms.

He said countries with minerals, energy and other commodities stand to benefit the most from China’s appetite for raw materials.

Under fire

Mr Zhao and others agree that the stimulus package, while effective as an emergency measure, does not address underlying economic problems.

Stephen Roach, chairman of Morgan Stanley Asia, is such a critic. He believes western consumption of Chinese exports will be weak for years and argues that simply pumping more money into construction and investment is unsustainable.

Instead, Mr Roach is urging Beijing to invest more money in providing better healthcare, pensions and unemployment benefits, in order to promote domestic spending.

Investments in social welfare account for only a fraction of the stimulus package, which is expected to run until November 2010.

“China is still an export machine,” he says.

“As an externally dependent economy, it’s almost mathematically impossible for China to save the world.”  –Juliana Liu, BBC News, Dalian, China