China's stimulus spending created infrastructure projects that may not be needed

In the United States, the $787 billion stimulus was financed by the federal government running large deficits. In China -- where the size of the stimulus as a percentage of the economy is several times that of the U.S. package -- most of the spending came from the country's state-run banks making loans to local government entities. The provincial and municipal governments are largely restricted from borrowing money, so most set up quasi-independent "investment companies" that took out huge loans to build subways, airports and office towers.

Economists estimate that out of the 4 trillion yuan (about $586 billion) stimulus package, the central government spent just over a quarter of the money, with the rest coming as bank loans to local governments. Also, many local governments took out additional loans on their own to finance public works projects. As a result, economists said, local governments are now sitting on a total potential debt bomb of 7 trillion to 11 trillion yuan.

"There's tens, or hundreds, of Dubais waiting in the pipeline," said Xu, referring to the debt-laden Persian Gulf emirate. "It was a panicked reaction to the global crisis. So they rushed out to spend money wherever they could. They borrowed from me -- and from every Chinese." He added another ancient proverb: "You eat your dinner at noon, you have to starve at night."

Even skeptics here agree that the stimulus worked at staving off a recession. The Chinese economy grew by 8.7 percent in 2009, while the economies of the United States and Europe -- China's most important export markets -- contracted or remained flat.

"You spend that much money," Xu said, "and the economy will grow."

But at what price?

"It's wasteful investment in some areas," said Andy Xie, a Shanghai-based economist. "The issue is not overbuilding. It's that lots of places should not develop at all. . . . A lot of local governments are developing places where people don't want to go."

The stimulus is supposed to conclude by the end of this year, but Xie said many projects were incomplete. "The withdrawal of the stimulus will be difficult," Xie said. "All these projects have to be finished."

Some economists are more bullish on the stimulus and more optimistic about China's ability to steer a sensible course out of stimulus spending and into sustainable future growth.

"It's my guess that the economic return on investment is likely to be quite high," said Lardy of the Peterson Institute. The infrastructure building "will facilitate China's rapid urbanization and economic growth."

Staff researcher Liu Liu contributed to this report.