China has overinvested and created mass overcapacity. Their economy has been propped up by stimulus, but it cannot last.
What I'm very interested in is the idea about what happens to us when their economy finally does crash - and it will, though the delay caused by the stimulus meant that our recession was worse and theirs will be milder, because we'll already be recovering and can consume some of their overcapacity.
If their overcapacity means they cut prices in America to try and stimulate purchasing in the US, US purchasing power will be increased. The end result is a form of stimulus - people can save more and consume more. It's unclear what would happen to employment - the substitution effect would say it goes down and the income effect would say it goes up - but it still should make US consumers better off. Banks that don't invest in China should be better off, as well, as consumers can save more, infusing them with fresh capital, which means they can lend more, also helping the credit markets and reducing interest rates.
It'll be interesting to see if a Chinese overinvestment-led recession can help pull us up. Today's jobs report indicated that perhaps we're on the upswing anyway (unemployment fell from 10.2% to 10%), so maybe this is a little juice to get us back on our feet.
I still think everyone is a little bit too pessimistic about the recovery - the only big qualification on that is the healthcare bill, which could quite easily stifle employment recovery, both by hitting America's future growth industries hard with taxes and lower prices, and by encouraging industrial and other production employers to shift production offshore. It may be a highly inflated recovery - with real GDP ahead of expectations but with lots of inflation, and it may be a recovery that's led by unexpected sectors (ie, tech, durables and consumer, not energy, metals and materials).
Theres also the US inventory effect - every firm has let inventories crater to save money, but to maintain the same level of sales as the highly depressed last year, production has to rise significantly because we don't have an inventory base to narrow. So that'll help stimulate US jobs, production and consumption.