Reading the weekly headlines of rapid economic recovery out of Beijing reminds one of Goebbel's gifted propaganda skills. Is China inflating one gigantic bubble of excess capacities that will end in tears (and hundreds of billions in non-performing loans in a few years)? http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=a6_rXxtBSsnk May 15 (Bloomberg) -- Chinaâs stock-market boom is as clear a bubble as you will find, the conventional wisdom says. When might it burst? Nobody knows if it will. The Shanghai Composite Index has surged 45 percent this year. Just because China has deep pockets in this time of global crisis doesnât mean its economic health supports this rally. Resources of Chinaâs magnitude are a nice thing to have at the moment. And while probably too late to buy into the market, investors who are already there wonât be disappointed. In a sense, buyers are betting on Chinaâs socialist tendencies rather than its success in fostering free markets. Cash-rich China has simply built a better bubble. Rather than boding well for Chinaâs long-term outlook, this rally serves as a reminder of risks facing the worldâs third-biggest economy. The strength of Chinaâs fiscal position got a headline- grabbing endorsement this week from Nobel Prize-winning economist Joseph Stiglitz. At a May 13 forum in Beijing, Stiglitz said China âhas taken very rapid action to address the crisisâ and may emerge as âa winner.â In the same address, though, Stiglitz undermined that argument in the long run. âWe are at the end of the beginning, rather than the beginning of the end,â Stiglitz said. âThe global economy may be declining at a slower rate and we may see a bottom soon, but it doesnât mean a full recovery.â Global Downshifting The rapid growth rates of the mid-2000s are a thing of the past. The downshifting of global expectations is taking place from New York to Shanghai. Even with the trillions of dollars of stimulus the U.S. is pumping into markets, American households face a multiyear process of saving more and spending less. That transition will prove painful for a world that relies heavily on the $14 trillion U.S. economy. The $4.4 trillion Japanese economy isnât much better off. Gross domestic product contracted an annualized 16 percent in the first quarter, following a fourth-quarter drop of 12 percent, according to the median estimate of economists surveyed by Bloomberg News. With the U.K., Germany and much of the euro area in recessions, feel free to engage in the fiction that Chinaâs $3.2 trillion economy will save the world. Far from that happening, global trends will increasingly close in on export-driven China. Stiglitz isnât wrong to think China will have a better 2009 than other major economies. Its 4 trillion yuan ($585 billion) stimulus plan and record bank lending are helping to fill the void left by plunging exports. The trouble is, thatâs a void too far, even for an economy thatâs as top-down as Chinaâs. Flawed Assumptions Be afraid when just about every economist agrees on something. Just about everyone seems to think China can pull this off, that it can artfully influence a vast, underdeveloped economy of 1.3 billion people without many of the policy tools at the disposal of the Federal Reserve or European Central Bank. The flaw in this assumption is that it takes for granted that all those stimulus yuan will be spent wisely and productively on worthy projects and companies. It assumes that those investments, much of them funded with debt, will morph into well-paying jobs that generate wealth for Chinaâs people. An even more fantastic assumption is that little of Chinaâs stimulus efforts will be squandered by corruption. Itâs hard to know how China can avoid vast amounts of public money being siphoned off by local government officials to speculate on stocks or property or to make luxury-good purchases. At What Cost? Even if China ekes out healthy growth this year, the question is what it will cost. China may be setting the stage for a Japan-like bad-loan crisis a few years from now. One also has to wonder if China is moving fast enough to rebalance its economy away from exports toward domestic demand. Itâs the âqualityâ of the growth that China produces that is the focus of economists such as New York Universityâs Nouriel Roubini. Chinaâs public-relations machine is working overtime to spin this story. Its success in getting the global media to play along explains why investors are rushing into Chinese shares. Just because China has built a more sustainable bubble, supported by the promise of ever more government largess, doesnât explain away the challenges facing the fastest-growing major economy. Government-directed bank lending has pretty much reached its full-year target and is poised to slow. The global export slump will increasingly take its toll. If China is a winner this year, as Stiglitz says, itâs a point that has many caveats. Officials in Beijing will be hard-pressed to replace the role of the U.S. consumer. Chinaâs stimulus efforts are no substitute for demand from American households, which are entering into a rare period of thrift. If you are sitting on big paper profits in China, it may be time to take them.