Sean O'Grady: Their spending power may save us all from recession

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The Independent Online

In 2008, China will contribute more to world economic growth than the United States. Were it not for China, in other words, the world would be staring at a recession right now. Untroubled by the credit crunch, China is still set to grow in the next year by something like 10 per cent. At that rate its economy will double again in seven years time, and it will be well on the way to becoming the world's second-largest economy, outstripping Germany and Japan. It may take just a decade to catch up with the US.

But for next year at any rate we should be thankful that China will probably save us from a slump. Even China's vast trade surplus with America they are now each other's largest trading partners may begin to correct itself thanks to the dramatic devaluation of the dollar and a more modest revaluation of the renminbi. That will help resolve one of the great "global imbalances" in economics and ease geopolitical tensions too, if it muffles populist US calls for more protection.

Meanwhile, we can still expect the various Chinese sovereign wealth funds, with trillions of dollars at their disposal, to carry on taking strategic stakes in major Western companies such as the one in Barclays that was acquired last year.

But are the Chinese using an undervalued currency to deliberately build up enormous trade surpluses that are then used to buy Western know-how and technology? Will we see more intellectual property and factory equipment crated up and sent east, as happened with MG Rover? Expect a controversy about the role and motives of such massive Chinese investments to become a renewed source of controversy especially within the EU.

However, there are signs that the trajectory of China's rise may not be quite as astronomic as we have come to expect; 2008 could be year when China faces its most serious financial crisis since Deng Xiao Ping initiated the market reform process 30 years ago. Western China remains largely agrarian and poor in stark contrast to the modern industrialised east. Beijing's rhetoric about balance, harmony and restoration of Confucius into official thinking has done little to resolve the question of such unequal growth. The rural poor are especially hard-hit by inflation in the price of basic foodstuffs. Just as Chinese growth has bid up the world price of oil so it has with food.

Inflation generally is accelerating as the economy shows signs of overheating. Are the Chinese authorities and banks ready to deal with such a problem? Most perilously, what happens if the bubble that is the Chinese stock market goes pop? The Shanghai market rose a further 161 per cent in 2007, and too many Chinese cleaners and cabbies have poured their life savings into what is basically a gamble. The rest of us can only hope their luck holds.

The writer is the Independent's Economics Editor