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Propaganda Wall Poster Shanghai China 1982Jon Bower China / Alamy

For those who once questioned the rising power and influence of China on the world economic stage, the 2008 global financial crisis laid any doubts to rest.

As stocks plunged, credit markets froze and major financial institutions collapsed, economies around the world went into freefall. China was caught in the storm too, as demand for its exports sank.

But the slowdown in China was exceedingly brief. In response to the downturn, Beijing rolled out an enormous stimulus package worth four trillion yuan or $570-billion (U.S.). China's economy took flight almost immediately as a slew of infrastructure projects including roads, rail and buildings sparked bank lending and GDP growth.

As those projects got under way in cities like Chongqing and Wuhan, they sent positive ripple effects half a world away to Canada's resource-driven economy. Chinese demand for coal, copper, iron ore, petroleum, lumber and other commodities almost single-handedly brought the resource market back to life and helped Canada weather the economic storm better than most Western nations. China is now responsible for more than 40 per cent of the world's metal demand.

The great recession was China's time to shine. The Asian economic superpower led the world out of the downturn, as its breakneck growth sparked global recovery and helped Europe and North America get back on track. In the process, China vaulted to the rank of second-largest economy on the planet as well as the world's largest exporter.

Now, nearly three years later, as a debt-laden Europe and a jobs-starved United States teeter once again on the precipice of recession, all eyes are back on China. Can the Middle Kingdom save the world again?

The answer, according to experts on China's economy as well as Chinese business owners and consumers, is probably not. At least, not in the same way it did last time.

China's economy is in a very different state today than it was at the start of the global financial crisis in 2008.

The country is still dealing with the side effects of its previous stimulus package: burdensome local government debt, stubbornly high inflation and a red-hot housing market that many say is set to blow up.

"I don't think China will fill the void of growth that is left from a slowdown of the Western economies at this stage," said Na Liu, the founder of CNC Asset Management and an adviser on China strategy to Scotia Capital.

"A new 'shock and awe' stimulus package from China like the one in 2008 is almost impossible at this stage."

At the same time, China's economy is decelerating from the more than 10 per cent GDP growth it enjoyed in 2010.

A third month of slowdown in manufacturing highlighted by a weak HSBC Chinese purchasing manager's report this week contributed to the market mayhem that sent global stocks into a tailspin and investors rushing for the safety of bonds.

Economists are cutting China's growth forecasts. The International Monetary Fund sees growth slipping to 9 per cent next year from 9.5 per cent this year. London's Capital Economics cut its 2011 outlook to 8.5 per cent from 9 per cent. Western countries can only dream of such growth, but for China it's a gear down.

"China's economy is weaker today than on the eve of the global crisis three years ago and won't be able to shrug off the problems elsewhere or be able to completely offset them," Mark Williams, the firm's chief China economist said in a report this week.

Indeed, Chinese manufacturers, a crucial element of the country's export-driven economy, today are grappling with a host of problems they didn't face just a few years ago. Spiking labour and production costs, along with fast-rising competition, are grinding China's manufacturing engine.

In Songjiang, an industrial suburb of China's financial centre Shanghai, chemicals waft in the breeze as Chen Yun gestures to a brand-new dark-red Chevrolet Cruz with palpable frustration.

The 45-year-old factory owner, who studied in Japan and has more than 20 years of experience in China's manufacturing sector, says the car – which costs more than 100,000 yuan ($15,600) – is owned by one of his workers. This would have been impossible a few years ago, he says, and it shows the many shifts in business that have him worried about the health of his factory and Chinese industry as a whole.

Three years ago, factories in this industrial park would stay open until 9 p.m. every night, and Mr. Chen's Shanghai Shininger Electronics Co. was paying his workers just 1,500 yuan a month. Now many of the workers are gone by 5 p.m. and wages have doubled to 3,000 yuan a month for labourers cranking out machinery that prints invoices and receipts. The wages for his engineers have gone up 50 per cent to nearly 10,000 yuan a month.

Many of the factories here that helped the world out of recession are now gone. The low-skill garment factories were the first to go, and now other owners are either shuttering their operations completely or moving to the Chinese interior. As the economy in China has sagged, Mr. Chen's customers are taking longer and longer to pay for orders, asking for 30-, 60- or even 90-day payment periods, which have hit his cash flow and made him increasingly reliant on loans. However, since the state-owned banks are refusing loans to small to medium-sized businesses like his own, Mr. Chen says, he has been forced to rely on private lenders with usurious interest rates as high as 60 per cent.

As he says this, Mr. Chen leans toward his factory, stretches his hands out, and then mimes the process of picking up a pile of cash and tossing it into the street.

"Now you have vacancies in every industrial park … If I move inland, the property there will just increase in price, too, and then what will I do?" asks Mr. Chen, standing in a crisp white shirt and khakis, holding up his hands with thoughtful resignation. "All I can do is increase efficiency. This year, I can squeeze out 20 per cent. But next year? The salaries must rise. I'm not sure I can survive."

As Chinese manufacturing and exports have dipped, the country has also been hit by cripplingly high rates of inflation – 6.2 per cent for consumer prices in August. That ties the hands of government, which is reluctant to unleash more stimulus spending that could spur inflation even more.

"China may not have the same strength we used to, [in order]to help the global economy," said a senior Chinese economic analyst in Shanghai, who spoke on the condition of anonymity because he often consults for the government. The analyst pointed to persistent inflation, decreasing manufacturing and exports, and weak domestic consumption as evidence of China's inability to pitch in as the world confronts yet another global downturn. "China cannot do the same things that we did in 2008."

Consumer angst

China's government has taken steps to boost domestic consumption as a way to even out its might as an exporter. But now many consumers are now feeling the pinch.

In Shanghai's ritzy Xujiahui neighbourhood, 25-year-old Zhao Zheng Qi and her 26-year-old friend Xia Yan Jie, who are six-months pregnant and four-months pregnant respectively, were busy shopping in the maternity section of a trendy mall. Ms. Zhao, who confesses that she used to liberally spend her parents money, says she has had to adjust to the times and change her shopping habits.

"Before, if I liked it, I bought it," she says bluntly. "Now I have to compare prices."

Before the two of them stroll off, arm in arm, Ms. Xia, Ms. Zhao's pregnant friend, chimes in: "Though our salaries have increased, it can never catch up with our expenses."

In the same mall, James Zhu, a 30-year-old who works in the pharmaceutical industry, says he has taken advantage of a stronger currency, but frets over the fact that the real estate market around him in China is starting to decline, as global equities are falling. "There are no good investments that I can think of," he says. "I'm worried about the future."

In a Carrefour grocery store in Shanghai's Putuo neighbourhood, there is similar pessimism. Liu Cong, a 48-year-old trader in a brown jacket and loafers, notes that gas prices have crept up over the past several months and that meat – particularly the pork beloved by Chinese – has also become more expensive. A nearby woman interjected repeatedly with approval as Mr. Liu voiced his frustration.

"If the price suddenly doubled, it would be easier to avoid certain things, but the prices have risen so slowly and that is what's really horrible," he says, adding that none of the price increases have flowed to China's poor rural farmers, only to logistics companies and the government. "Finally, inflation has blown up. And the citizens can't do anything."

Near the frozen chicken, Pan Man Kung, who moved from Hong Kong three days earlier, points to oranges and peaches in her cart and gripes, "The things here are even more expensive than in Hong Kong."

But she is optimistic about the Chinese economy, saying it is resilient. Ms. Pan, who has travelled back and forth between Hong Kong and Shanghai for years because her son works here, notes that rising incomes have meant that many mainland Chinese are now shopping in Hong Kong. At the same time, Hong Kong natives are crossing the border to try to find bargains in the fake stores of Shenzhen. "When I take the train, the Chinese have four or five bags, and I think, 'Oh no, the Chinese are richer than us, now,' " she says with disbelief.

Not all Chinese, of course, are rich. Per capita GDP is roughly a 10th of that in North America. That's part of the problem. But Alexandre Dam thinks it may be part of the solution. Mr. Dam, a project manager at SCR Global who helps French garment and clothing companies manage their supply chains in China, has recently begun to lay the groundwork for launching retail outlets for French chains outside of the major cities, in China's interior. "Second-tier cities are a good place for mid-level Western brands," Mr. Dam says. "The demand is blowing up in the second- and third-tier cities. And for sure, the Chinese economy will be supported."

Indeed, China's plan to develop infrastructure and promote more urbanization in the country's second- and third-tier cities will sustain strong economic growth and commodity demand from Western countries like Canada for years to come, according to analysts Andrew Keen, Thorsten Zimmermann and Lourina Pretorius at HSBC.

"In terms of long-term structural trends, demand is now driven by an urbanization process that is far more structural than consensus generally believes," the analysts said in a recent report. "On our analysis, China is only 20 to 25 per cent along the path towards being a mature materials market and it may take at least six to nine years before demand intensity peaks."

Resource company executives are making the same bet.

As Canadian resources stocks tumbled again Friday, Don Lindsay, the CEO of Teck Resources, Canada's largest base metals producer, outright dismissed the market turmoil and suggested that China would once again save the day for the resource sector.

Mr. Lindsay said commodity producers such as Teck used to depend on the U.S. and Europe. "While the market still hangs on that belief, I can assure you it's no longer true," he said, rattling off a list of China statistics, from its huge copper demand to rapid urbanization. Teck's sales staff is currently working on fourth-quarter contracts and prices, and "we haven't seen anything unusual" suggesting a change in demand, he said.

Sales of B.C. lumber to mainland China have been surging for several years, on pace to exceed $1-billion this year for the first time. But after a boom earlier this year, the latest statistics show the pace of growth slowing significantly. Still, foresters remain confident China's long-term growth will keep sales strong.

"They have a very aggressive five-year plan," said Hank Ketcham, chief executive officer of West Fraser Timber.

"You know there's going to be a lot of construction."

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