South Korea may owe China a debt of gratitude.

Officials in Beijing managed to do what their counterparts in Seoul couldn’t: create a bit of optimism about South Korea’s economy. They did so with a massive $586 billion (Rs28.6 trillion) stimulus package, a step that upstaged Henry Paulson’s $700 billion rescue plan in Asian capitals.

So much for the US treasury secretary’s bazooka. That was the financial weapon Paulson threatened to aim at the US credit crisis in July. Three months on, the Dow Jones Industrial Average is still sliding, US consumers are worried and world leaders are biting their nails.

China’s bazooka is proving to pack more firepower among economists. Yet, will spending one-fifth of gross domestic product to prop up growth work? Not necessarily. Asia should curb its enthusiasm about China’s ability to shield the nation’s 1.3 billion people from a global slump.

There’s a chance some investors are already pricing in that risk. After rallying early this week, stocks slid on Tuesday on concerns about a worsening global outlook. News that Australian business confidence fell to the lowest level on record was a reminder of obstacles facing the Asia-Pacific region.

It’s far from clear that China has the domestic wherewithal to keep growth as close to 10% as the Communist Party bigwigs would like. Economists generally see 10% as what’s needed to produce enough jobs to keep living standards rising and to maintain social stability.

External influences

No one doubts China’s financial resources. It has about $2 trillion of currency reserves to lavish on low-rent housing and roads, railways and airports, and tax deductions for purchases of fixed assets such as machinery. It has banks, even the publicly traded ones, at its disposal to plug any economic holes that suddenly appear.

Yet the external picture matters more. China relies heavily on exports to produce growth. Anyone who doubts that need only look at how quickly the government’s focus has gone from inflation to deflation.

Data released on Tuesday show why. China reported the slowest export growth in four months in October, while inflation cooled to the slowest pace in 17 months. “As the contribution of trade to China’s growth dissipates, we expect further measures to be introduced aimed at stimulating consumption and investment in the domestic economy," says Jing Ulrich, chairwoman of China equities at JPMorgan Chase and Co. in Hong Kong.

The trouble is, such plans must be financed. That could prompt China to sell hundreds of billions of dollars of US treasury and agency securities, or at least slow its purchases. The result would be sharply higher US rates.

“China’s need for money will collide with the ramp-up of US borrowing, expected to be between $1.5 trillion and $2 trillion because of the massive US budget deficit," Tony Crescenzi, chief bond strategist at Miller Tabak and Co. in New York, wrote in a note to clients.

It raises questions about whether the US can really borrow its way out of this crisis, John Maynard Keynes-style. The same goes for monetary policy as the Federal Reserve joins Japan in cutting rates towards zero. Will investors stand for the US passing along massive liabilities to future generations and the dollar’s value dwindling?

Steady yuan

Commodity prices are another wrinkle. By stabilizing world prices, China’s stimulus plans will benefit commodity producers more than buyers. Global inflation helped precipitate the US’ financial woes, and drops in the prices of oil, food and other key commodities are a plus for American households. China’s pump priming may work at cross purposes with the US.

Also, without big upward revaluations in China’s currency, stimulus efforts remain more a domestic affair than a global one. If the yuan holds near current levels, it’s not clear how Asia, Europe or the US will benefit. That’s especially so with spending focused on infrastructure. While some multinational companies may profit from China’s largesse, the US job market probably won’t.

There are other reasons to doubt China’s economic omnipotence. China’s lack of a thriving secondary debt market to multiply the central bank’s efforts is a problem in the best of times. It’s an even bigger impediment with global credit markets effectively frozen. Rate cuts by the People’s Bank of China may lack the oomph the economy needs.

The emphasis on boosting growth with new roads, bridges and dams is questionable, too. Such projects didn’t enliven growth as much as advertised in the 30 years since China’s economic modernization process began. What propelled growth to recent heights was trade, particularly China’s succession into the World Trade Organization in 2001.

That’s not to say China’s efforts won’t be a hit at this weekend’s meeting of the Group of Twenty (G-20) nations in Washington. “China showed the G-20 with this package that it is a big player in the world economy, capable of contributing to global economic stability," Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, said in a report.

Contributing to the global economy in its time of need is one thing. Saving it is quite another. Just like the outgunned Paulson, China may need to find a bigger bazooka.

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