Ten months after China unleashed a massive economic-stimulus program, worries are building about what happens to the world's third-biggest economy when the government money runs out.
China's stock markets have plunged this month on concerns Beijing might tighten the reins on lending and abruptly end the party. Even if the speculation is overblown, the economy still looks unready to motor on after the four trillion yuan ($585 billion) in stimulus starts to fade later this year.
The authorities haven't weaned the economy from its dependence on exports, so with demand for Chinese goods in key markets like the U.S. likely to remain weak, the letup in public spending and loans later this year could leave China in a bind.
While the country might shift benignly to stable levels of economic growth, it faces the risk of a renewed slowdown -- or worse -- next year, asset bubbles, overcapacity in basic industries or a burst of inflation from all the money the authorities have injected into the economy.
"China is not changing its growth model," says prominent China-watcher Andy Xie. "It is pumping up demand in ad hoc ways."
Instead of steering the economy toward growth based on domestic demand, Beijing is using stimulus as a stopgap until exports rev up again, says the Shanghai-based economist. But if developed economies don't rebound as expected, "we will have a second dip by around the middle of next year and we will be talking about a second stimulus" in China, Mr. Xie said.
Worries like this partly explain why Chinese shares sank 15% from Aug. 4 through Friday after jumping about 90% since the start of the year. The Shanghai Composite Index closed 1.7% higher Friday at 2960.77.
China is likely to hit the government's official growth target of 8% if for no other reason than the authorities have the power to make that happen, at least for a time. Money supply is growing at its fastest in 13 years and fixed-asset investment is running at growth levels not seen since the height of the last inflationary cycle in 2004.
Economic growth picked up to 7.9% on year in the second quarter from 6.1% in the first as the stimulus kicked in and the global economy began to stabilize.
If China doesn't find a substitute for exports as the stimulus wanes, however, it will have to live with slower growth, although Subir Gokarn, chief Asia-Pacific economist for Standard & Poor's says that "may not be such a bad thing."
S&P forecasts China's growth will slow to 7.5%-8.0% this year from 9% last year, then edge up to 8.0%-8.5% next year. On the bullish end of the spectrum, Goldman Sachs expects China to zoom to 11.9% growth in 2010.
There is always an outside risk, though, that with the massive amounts of cash China has pumped into the economy and questions about the country's published data, things could take a turn for the worse, potentially spelling another rough period for global markets and even economies.
