China's economy on the rise

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China's attempts to revive its flagging economy seem to be working. Today, the country reported 7.9 percent growth in its second quarter. The World's Jeb Sharp reports on what impact China's economic growth may have on the rest of the world.

LAURA LYNCH: I'm Laura Lynch, this is The World. China got some good economic news today. It reported strong domestic growth in the second quarter of the year. China's attempts to revive its flagging economy through stimulus spending seem to be working. The question now is whether China's growth can help the economies of other countries rebound. Here's more from The World's Jeb Sharp.

JEB SHARP: China's success is pretty astonishing given the depth of the recession in most of the rest of the world. It's also very good news for a huge country worried about social unrest. Its economy grew by 7.9 percent in the second quarter, and is well on track to meet its goals for 2009.

ESWAR PRASAD: This is a remarkable turnaround.

JEB SHARP: Economist Eswar Prasad of Cornell University.

ESWAR PRASAD: The Chinese economy seemed to be hitting a wall towards the end of 2008, and the government has managed to engineer an effective stimulus that has driven growth, if the numbers are right, where in excess of 10 percent, which is really fantastic in terms of the stimulus performance and in terms of the ability of the economy to rebound.

JEB SHARP: The Chinese government released its latest figures this morning. US Commerce Secretary Gary Locke happened to be in Beijing.

GARY LOCKE: Well that's very encouraging and of course we want that to happen all around the world.

JEB SHARP: But Chinese officials aren't gloating. Government spokesman, Li Xiaochao, said there are still numerous challenges ahead.


JEB SHARP: He mentioned that prices for some goods are still dropping, and that overall demand isn't as high as they'd like. He also pointed out that some industries are having over-production problems. Wang Tao says that's in part because global demand for Chinese goods is down. She's the head of China economic research at UBS Securities.

WANG TAO: One part of the engine for China's growth, the export side, is still very weak, actually still in decline. So global demand is still very weak and the recovery so far has been driven by stimulus, and that may or may not be on a sustainable path as yet.

JEB SHARP: The big question outside China of course is whether China's rebound will give anyone else a lift. Much of the rest of the world is still mired in recession. Eswar Prasad says in the short term there won't be much effect.

ESWAR PRASAD: China is the third biggest economy in the world, so the fact that they are growing so fast certainly adds to confidence in the world recovery. But the reality is that China's not going to be able to pull other economies, except for a small group of commodity-exporters and countries that export directly to China. Other than that the effect on the rest of the world is going to be quite limited.

JEB SHARP: And the danger is that China creates lots of spare capacity that it needs to export, which is part of what got the global economy into trouble in the first place. Sebastian Mallaby is a senior fellow at the Council on Foreign Relations.

SEBASTIAN MALLABY: That's really the heart of the issue. They have to acknowledge that they won't get large external demand in the rest of the world to carry on driving their growth model. They've been relying too much on exports as a way of powering their economy, and the single biggest, sort of, driver of that Chinese export growth was a US deficit. That can't continue, so they've got to drive growth by stimulating more domestic demand within China.

JEB SHARP: Mallaby says if China can drive growth in areas such as health care, rather than focusing too much on export infrastructure such as ports and roads, the recovery is more likely to be sustainable over the long term. For The World, I'm Jeb Sharp