The world in 2010: China continues its unstoppable economic charge

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The Independent Online

China and six other South-east Asian countries yesterday toasted the inauguration of the biggest free trade area in the world, when the Association of South East Asian Nations, or Asean-6, was formally launched.

Covering nearly 2 billion people in Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand, along with China, Asean-6's stated aim is to eliminate tariffs on almost all traded goods between its members.

China, by far the biggest member, holds the whip hand in the bloc, with some voicing concerns that the country's manufacturers, who have become the engine behind the world's economy for a number of years, will force overseas competitors out of business. Indeed, four members of Asean have opted not to join the founding six countries in the free trade area. Vietnam and Cambodia, for example, are only due to join in five years' time.

The launching of Asean-6 further demonstrates China's growing and seemingly unstoppable rise as a global economic superpower, however, and even if 2009 was benign by Beijing's recent history, by Western standards growth in the world's most populous nation was breathtaking. The World Bank predicted in June that the planet's third biggest economy (behind the US and Japan) would grow by 7.2 per cent in 2009 (the Chinese themselves predicted a slightly more impressive 8 per cent), a marked improvement on the "disappointing" 6.1 per cent of GDP growth recorded in the first quarter of last year, which was China's worst three-month performance since 1990.

Last week, Premier Wen Jiabao gave a cautious outlook for China's performance in 2010, adding that it was too early to bring a halt to the huge 4 trillion yuan stimulus package, which was introduced to offset the impact of falling global demand for its products.

"In 2010, the external environment will remain rather grim but it will not deteriorate further," said Zhang Liqun, an economist at the Chinese State Council's Development Research Centre, which yesterday predicted growth of 9.5 per cent for this year. The think tank's 2010 forecast is well above Beijing's stated target of 8 per cent, which it sees as vital for job creation and ensuring social stability.

The Asian Development Bank has put its 2010 economic growth forecast at 8.9 per cent, while the International Monetary Fund predicts 9 per cent.

Whatever the eventual figure, the worst is seemingly over for the Chinese economy, which several analysts have forecast will eventually surpass that of the US as the world's biggest. Goldman Sachs, for example, reckons China's GDP will surpass that of the US by 2027. Despite the improving outlook for 2010, Chinese authorities are also aware of the threat of inflation. In his address, Premier Wen warned that officials needed to be watchful for a better than expected recovery leading to a hike in prices, especially in the real-estate sector: some Chinese cities saw residential property prices rise by about a third last year, and real-estate investment in China accelerated in November, up 17.8 per cent for the first 11 months of 2009 compared with the same period in 2008. "Parts of the economy are not balanced, not co-ordinated, and not sustainable," Mr Wen said, adding that "it would be better if lending by Chinese banks was not on such a large scale".

Manufacturing will continue to be China's breadwinner. The sector recovered well in the last few months of last year, with rises in new orders and output driving the purchasing managers' index to a 20-month high of 56.6 in December, from 55.2 in the previous month.

That will cheer companies supplying the Chinese economy. Both BHP Billiton and Rio Tinto, the London-listed mining giants, have said recently that it is too early to predict real Chinese demand for raw materials. Meanwhile, Rio still has concerns over the incarceration of 4 of its employees who were arrested last summer on charges of bribery and "illegally obtaining commercial secrets". Rio has moved most of its China-based staff to Singapore.

And China shows no sign of easing the controversy over its exchange rate in 2010. A host of top-level international policymakers and politicians have urged Beijing to allow the yuan to appreciate, which would make Chinese exports more expensive. However, in his speech last week, Premier Wen dashed hopes that the new year would lead to a change of policy. The currency has been virtually pegged to the dollar since the start of the financial crisis in the middle of 2008.

"We will not yield to any pressure of any form forcing us to appreciate. As I have told my foreign friends, on one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures," he said. "The true purpose [of the calls] is to contain China's development."

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