Power shifts East as China marches on

The centre of gravity of economic power is tilting rapidly to the East once again. While the rest of the world struggles to emerge from the deepest downturn in three-quarters of a century, China has returned emphatically to double-digit growth, having hardly missed beat.

The country's economy now stands 11.9 per cent higher than it did at this time last year. Most of the western economies will grow by only 1 or 2 per cent in 2011. China has benefited from the largest proportionate fiscal and monetary stimulus in the world, and a pick-up in exports from the revival in trade and a competitive currency.

Because of the weakness a year ago, the annual rate looks especially strong. On a quarter-on-quarter basis the pace of growth is slowing slightly, at 2.5 per cent now.

The latest figures also mean China is almost certain to overtake Japan as the world's second-largest economy, behind the US, this year. Growth in China bottomed out at an annual rate of just over 6 per cent in the first three months of 2009, rising to 10.7 per cent in the year to the last quarter.

"We have got off to a good start this year," said an official spokesman, with typical understatement.

But although stock markets were cheered by the news, confirmation of China's robust recovery comes at a time of renewed tensions between Washington and Beijing about the Chinese currency - the yuan - which many in the US say has been kept deliberately low against the dollar to keep Chinese exports cheap and to protect her trade surplus with America. Some fear that a trade war may break out between the two economic giants.

The European Central Bank yesterday criticised China's huge trade surpluses with the West, saying: "At the current juncture, global imbalances continue to pose a key risk to global macro-economic and financial stability. The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies."

A meeting to discuss the currency issue between President Barack Obama and the Chinese Premier, Hu Jintao, on the margins of the nuclear summit in Washington earlier this week failed to generate much harmony. Obama urged China to put the yuan on a more "market oriented" footing, but Hu said the currency's value would be set primarily for domestic purposes.

Many economists see an upwards revaluation of the yuan as inevitable, but the timing and extent is a hugely sensitive issue for both nations. In the US, the Treasury Secretary, Timothy Geithner, delayed the publication of an official report labelling China a "currency manipulator" until after the talks between Obama and Hu.

Trade sanctions on China have been advocated by many members of Congress, as well as leading economists such as Paul Krugman. Such developments are of concern far beyond the US and China. A return to breakneck growth rates in China is bidding up world commodity prices. Oil is back to about US$86 a barrel, with copper close to US$8000 per tonne and its 2008 price peaks. Higher raw materials prices are choking growth in the West and reducing living standards - one of the ways that income and wealth is being transferred progressively eastwards. America's trade gap with China was one of the main "global imbalances", the fundamental economic forces that led to the credit crunch and what the International Monetary Fund (IMF) now calls the Great Recession.

Despite frequent pledges by the G20 group of large and fast-growing economies to act on these issues, little progress seems to have been made on the largest problem, the US-China deficit. As a result, China continues to add to her foreign currency reserves, which at US$2.4 trillion ($3.37 trillion) are the largest in the world (although she did run a freakish trade deficit in February).

Just as the Chinese rely on the US and Europe to provide ready export markets, so too do the western nations depend on the Chinese to buy their government bonds. Any hint by the Chinese authorities that they are about to unwind their dollar reserves usually sends shockwaves through the market for US Treasury securities and the greenback itself.

However, economists are hopeful that the very strength of China's recovery may force authorities there to cool an economy that shows signs of overheating, and to allow the yuan to drift higher, making Chinese goods more expensive and taking the pressure off the US trade deficit.

Prices in China's shops are rising at a remarkably low rate of 2.4 per cent per year but "factory gate" inflation, which shows any price increases in the pipeline, is accelerating.

Meanwhile, the Communist Government is openly concerned about house price bubbles developing in many of the nation's big cities. Prices were up 12 per cent last month alone and banks have been ordered to curb their lending. Any rise in interest rates might also push the yuan higher, if the Chinese central bank allowed it.

The current growth rate is running some way ahead of Beijing's official target of 8 per cent this year. This is the pace consistent with creating sufficient jobs to prevent unemployment rising. Such is the size of the Chinese population that 27 million jobs need to be generated every year.

- INDEPENDENT