But Beijing faces big problems down the road. By Andrew C. Schneider, Associate Editor January 26, 2010 U.S. exporters and investors will benefit from China’s recovery in 2010. Public spending on infrastructure will push GDP growth to 9.5% on top of last year’s 8.5%. That will translate to healthy Chinese imports of equipment and services tied to mining, construction, water treatment, shipbuilding, food safety and health care. The problem is that while Beijing’s stimulus is a near-term boon, it’s also the only game in town. Despite burgeoning domestic consumption, China’s economy still depends overwhelmingly on exports. But U.S. and European demand won’t climb back to prerecession levels for years, nor will any of the other large emerging markets pick up the slack. Sponsored Content That puts Chinese policymakers in a bind. They recognize that they will need to withdraw government stimulus at some point. Easy money is already raising the specter of asset bubbles and nonperforming loans. Beijing is signaling it intends to tighten lending requirements, and two of the largest state run banks, Bank of China and the Agricultural Bank of China, have suspended lending for the rest of January in response. But such assistance is the only lifeline many state owned factories have. Cutting it off completely would throw huge numbers of Chinese out of work, raising the danger of social unrest. That’s a situation Beijing wants to avoid at all costs. With its ruling ideology dead in all but name, China’s communist government depends on economic growth and political stability to maintain its hold on power. Advertisement So for at least the next year, the state will continue to purchase stability through cheap loans. Beijing is convinced it can head off any bubbles before they get out of hand. But that leaves the more serious headache of rising overcapacity in heavy industry. Keeping unproductive factories in business will also depress wages, hurting domestic consumption. It will also hold down profits, leaving insufficient funding for research and development. “Before the recession, the Chinese had a plan to move [their manufacturing] toward higher value goods and greater efficiency,” says Adam Segal, an expert on Chinese development and domestic policy at the Council on Foreign Relations. “[They] put that on hold because of concerns about employment.” Meanwhile, such factories will pump out more goods than even China’s appetite for infrastructure can absorb. Inevitably, they’ll dump the excess on foreign markets. Underpriced Chinese steel, aluminum, cement, chemicals, refining equipment and wind power machinery will spur a rash of unfair trade cases in the U.S. Even if Beijing does manage to hold down fresh loans to business, many of those already issued are likely to go bad. When that happens, it may have to bail out state run banks for the second time in a decade. China’s massive foreign currency reserves give it ample room to do this, but it would be an embarrassment to one of the few large economies to escape last year’s wave of bank failures unscathed. For weekly updates on topics to improve your business decisionmaking, click here.