Most fiscal rescue packages are designed to restore linkages to the rest of the world, by stimulating the consumption of tradable goods. China, however, has gone the other way. It has been frantically building roads and power plants in a determined internalisation of wealth.
That approach is based on the assumption that a collapse in exports would be a blip – one that could be offset by state-sponsored splurges on fixed assets. Thursday's third-quarter gross domestic product numbers showed that the strategy has been a success, on its own terms. Over the first nine months, the economy grew 7.7 per cent. Of that, investment accounted for 7.3 percentage points and consumption 4 percentage points. The decline in net exports lopped off 3.6 percentage points.
But what if that assumption is wrong? The decline in exports is slowing, yes, but shipments in September were still 15 per cent worse than they were in the month of Lehman's demise – the eleventh straight month of falls, and not much better than the 17 per cent fall in the darkest days of March. The longer they remain sluggish, the longer fixed-asset investment will have to compensate, raising the risk of growth being hit by an investment-led slump.