In the coming days, when Japan releases its 2009 full year figures, it is almost certain that China will prove to have overtaken it to become the world’s second largest economy after the United States. Indeed, analysts at PriceWaterhouseCoopers this week predicted that in 20 years, China will be in the top spot followed by the United States, India, Japan, Brazil, Russia, Germany, Mexico, France and the UK.
China’s economic growth continues to astound. Overall last year the economy grew by 8.7 percent, ahead of official predictions that had factored in a sharp drop in manufacturing demand from its international customers. In the last quarter of the year, economic growth accelerated to 10.7 percent and China, therefore, surged into 2010 with filling order books and still rising confidence.
The downside of every economic boom is the danger of price inflation. In China this is most apparent in its property market. There is a major building boom, fueled by soaring prices for prime residential real estate and an apparently unquenchable demand for offices and hotels. Above most Chinese cities is a tracery of high-rise construction cranes as speculators erect yet more and more buildings. The surge reminds some commentators of the massive speculative property bubble that burst in Japan 20 years ago and has since condemned the economy to something approaching stagnation.
China’s leaders, however, seem wise to the danger. Just as they produced a highly effective stimulation package to encourage domestic demand to make up for lost foreign custom, they have now turned to the banks to rein in credit. The trick will be to get the balance right. A tightening of bank money could leave some heavily-exposed property speculators with big problems. In fact, a few big bankruptcies would probably do no harm but rather instill tighter corporate discipline. But an overtightening could produce pressure not just on speculators but on the banking system that has funded them. Such, however, is the dominance of the state in the financial system that Beijing has the power to trim and correct its tighter money policy and indeed continue to direct funding where it will have the greatest overall economic return.
The big issue now is how China will use its growing economic power on the world stage. The refusal to revalue its currency against the dollar is producing serious tensions in world trade. The US had already mounted what Beijing protests are protectionist levies on the likes of Chinese steel and auto tires. Looming disputes are likely to keep the World Trade Organization busy at a time when the failure of the Doha Round of trade talks continues to imperil the future of ordered markets. As China moves inexorably toward top economic slot, it is going to have to engage far more closely with the world. It needs to foster prosperity in the economies that will buy its goods. Despite the justifiable pride the Chinese take in their extraordinary economic and technological achievements, there is a worrying sense that they still lack the confidence to project their worldview.
