The dragon awakens: China, how did it happen?

China's growth over the past few years has been nothing short of miraculous, and it is predicted that the economy will overtake America's within a generation. But how did it all happen? And what are the implications for the rest of the world?

What is happening in China is the greatest economic story on the planet. It is the world's biggest boom – and not just the biggest boom right now, but the biggest boom that has ever occurred in history. It is having profound effects on our daily lives, from cheaper goods in the electronics shops to more expensive petrol at the pumps. It is also having a profound effect on global power. This year China will in all probability pass Germany to become the world's third largest economy, after the United States and Japan. It seems likely to pass Japan within a decade and it is possible, though this is much less certain, that it will pass the US within a generation.

So we are seeing a reordering of the world. It is inexorable and probably inevitable, but where might it run and what could that mean for the rest of us?

The economic reforms of Deng Xiaoping began in 1978, introducing – very slowly – the market system into what is still in many ways a controlled economy. Now, a generation later, we can see how what started as a quiet revolution has now spread through perhaps half or two-thirds of the country, transforming it from an agrarian society into an industrial one.

There are still two Chinas. There is the China the visitors see, the glittering cities of the great arc that stretches down from Manchuria, with its port of Dalian in the north east, past Beijing and Shanghai, and much further round, Hong Kong, towards Guangzhou in the subtropical south east. And there is the rural China, huge river systems, plateaus and plains, that supplies labour to propel the growth but which is otherwise largely untouched by what is happening a few hundred miles to the south and east.

The statistics of the boom are astounding. China consumes nearly half the world's cement and produces 40 per cent of its socks. It commissions a new power station about every four days and last year built as much power generating capacity as the entire output of France. It plans to build 97 regional airports in the next decade. And so on.

You see all this. Visitors arrive via glittering airports and head into town on six or eight lane highways. There is the famous view from Shanghai's Bund across the Huangpu river to the towers of the new financial district of Pudong. There are Beijing's concentric ring roads, always jam-packed with cars, and the new apartment blocks on the outskirts of every large city. There are new flash hotels and shopping malls, for China has elevated consumerism to the pedestal once occupied by Communism. And there is the smog.

Yet sometimes in the middle of the glitz you catch a glimpse of the other China. I caught it twice on my most recent visit. Once was walking at night beside a building site in Pudong, when we found ourselves going past the cabins where workers were sleeping in their tiers of bunks. I suppose the quarters were perfectly adequate, if not much fun. But you do realise that the great building boom could not happen if there were not millions of workers living away from their families and keeping the cement pouring. China's birth rate is very low, thanks to the one-child policy. Though that policy now seems to be being relaxed, there will eventually be a demographic time bomb. But until now there has been this almost unlimited supply of labour from the land and the boom runs on.

The other occasion was on the train pulling out of Shanghai. We were passing a wasteland, a site that had been cleared for new building. I glanced out of the window just as we were passing one of the last of the buildings left standing and for an instant saw a group of concerned people carrying out an elderly woman, who was clearly in some distress. I am pretty sure she was being taken from her home prior to its demolition. Then the train picked up speed and we were gone.

Victorian England must have felt like this. Visitors to Manchester were equally appalled and in awe of the stream-driven cotton mills. Huge wealth; huge misery. People ran to the city not because there were good jobs in the mills but because it was a better living than they could have had in the country. At least there was food to eat and there was money to be sent home. And so the workers flock to the cities in China, to what we would call sweat-shops, to produce the toys, clothes and furniture for the shops of the West.

Those a little higher up the income scale are the 400 million or so of the new middle class. They own their flats, bought often with cash rather than a mortgage. Some have in the past three of four years bought their first car and it is often evident they are still figuring out how to drive it. Goods are cheap. Everything is copied, which makes life tough for Western companies trying to get in on the act. Ikea wondered why its stores were full of people but they were selling so little. What was happening, apparently, was that people would come in and see an item they liked and, instead of buying it, they would take the catalogue and get a copy made up round the corner for half the price.

Yet, despite the evident celebration of consumerism, most Chinese save like fury. Only about 40 per cent of GDP is accounted for by consumption, compared with 65 per cent in the UK. Those savings are for all the usual purposes, but most particularly for old age – for everyone knows that if and when they retire they will have to provide for themselves. They cannot rely on the state and maybe not even, given the very low birth rates, their own children, to support them. I was told by a young Chinese friend that the gradual awareness that a daughter was more likely than a son to be around to look after you in their old age was rather changing the age-old preference for male babies, though this does not yet seem to be reflected in the statistics, or indeed in the streets.

Women, however, are sharing in the new prosperity. Two of the young women whom we spent time with last year owned their own flats and I am told that 30 per cent of the Ferraris sold in China are bought by women.

So what will happen when China gets old? If you look at the population pyramids of Beijing or Shanghai they are not pyramids at all. They are diamonds: very few really old people, a huge mass of middle-aged, and relatively few children and babies. China's economic growth is being driven by this big working population, which is supporting relatively few dependents. That will change. When it does, China's growth rate will inevitably decline. What we are seeing now is a burst of growth that will gradually come to an end. China will become a more "normal" economy in another 20 years' time.

Making that transition from the present "big bang" to more of a "steady state" will be tough. Coping with an ageing population will be one of the three huge challenges faced by the Chinese economy, but it is still a little way off. The other two are more immediate: coping with the environmental and resource pressures of growth; and coping with the social and regional inequalities that it has generated. What happens next depends crucially on how well it succeeds.

We can, of course, only guess. What you can say is China will continue to scour the world for resources. It was put to me by a Chinese economist that it was like a hungry teenager: it was putting on a growth spurt and therefore needed to eat a lot to keep going. That is not going to change, or at least not going to change while growth continues. If China is forced to prioritise between growth and the environment, growth will come first. But it would be wrong to say that the Chinese authorities are indifferent to the environmental consequences of this headlong rush to grow. Everyone in authority voices concern, even if they dislike being told by the West to clean up their act. Talk about their carbon footprint and they will point out that the factories that account for the carbon emissions are making goods for Western consumers.

Still, the damage to the local environment is so obvious – the air quality in Beijing or Shanghai, for instance – that change will happen. If concern about Chinese public health is a much stronger motive for cleaning the place up than worries about what the rest of the world thinks, so be it. But this will take time and a huge amount of damage has been done.

Social tensions and economic inequalities may be even harder to tackle. You can really only catch a feel for that from the Chinese people themselves. A young Shanghai woman told us how she and another friend had spent their last holiday travelling round the deep country: they wanted to see the other China. She described houses where the animals lived on the ground floor, the family in the middle and the fodder was stored in the loft. She realised that these farmers had never seen people like her, the foreign-educated, new middle class of the cities, just as people like her never saw life in the countryside. They could not communicate for there was no common language. The division is even more stark than Disraeli's two nations: at least we could talk to each other.

Investment in China's infrastructure is racing onwards and eventually the deep rural areas will become better connected to the burgeoning cities. Language barriers will be overcome and so the regional chasms will be narrowed. The social and economic gaps within the same regions will remain and it is hard to see quite how that will be tackled. At the moment the reverse is happening: there is a celebration of wealth and the pursuit thereof. China does not do guilt. Those that have it, flaunt it.

At some stage in the future there will be a bump. Maybe the present global downturn will trigger a sharp slowing of growth there, though previous ones have not deflected the China growth project at all. Maybe, post-Olympics, the pressures from rising world food and energy prices will lead to economic or social disruption. There is always the possibility of some disruptive political event: what happens in Taiwan? More narrowly, the authorities have to cope with the overheating of the economy and try to rein back growth, always a difficult manoeuvre. But while I cannot see straight-line growth continuing I find it hard to see anything happening that would completely derail the country's present run for growth. This has been running now for 30 years. It has too much momentum to stop suddenly. The Chinese authorities and the new middle class have too much invested in what is a great success story to allow it to falter.

I am not sure we in the West fully grasp the magnitude of what is happening. Intellectually we can see it affecting us but emotionally it is hard to understand that we are moving towards a world where Western ideas, our ideas, will no longer hold sway. China has other ideas. Those will increasingly co-exist alongside ours in shaping global economic and political development. You can see that most obviously in Africa now. If a country seeking inward investment does not want to submit to the guidelines of the World Bank or Western donor agencies it can, if it has something to sell, get China to supply the funds or build the infrastructure instead. This is just an early sign of the shift in power that will go much further.

We will not find this comfortable. What we think will matter less and less. But we cannot do anything about it, and in any case, consider the alternative. Would we really want a China that was failing in economic terms, with all the misery that would cause? That would surely be far more dangerous and disruptive to the world than a continuation of China's thrilling but terrifying success story.

China: In Numbers
By Simon Usborne

30,000: The expected number of Chinese MBA graduates in 2008. The number in 1998: 0

5.7 million: Students graduated from Chinese universities in 2007 (compared with 270,000 in 1977)

30: Number of nuclear power plants being built in China

500: The number of coal-fired power plants China plans to build in the next decade

10 million: The estimated number of Chinese people who have no electricity

97: New airports to be built in the next 12 years, bringing the total number to 244 by 2020

540 million: Number of mobile phone users in China, with an increase of 44 million in the past six months

180: The number of foreign press correspondents arrested or harassed in 2007

67: The percentage of journalists who replied "no" when asked in a survey by the Foreign Correspondents Club of China if they believed Beijing had kept its promise to give foreign media "complete freedom of reporting" in the run-up to the Olympics. Only 8.6 per cent said "yes"

33: The number of Chinese journalists thought to be held in prisons in 2008

95: The estimated percentage of DVDs sold in China that are fake. Uncensored foreign films are widely available from 50p

20: The approximate number of foreign films passed by Chinese censors each year for screening in cinemas. Banned films have included 'Ben Hur' (for its depiction of religion), 'Brokeback Mountain' (for its homosexuality) and the 'Borat' film (for its depiction of, among other things, incest).

Passed films are often subject to further editing. Examples include the deletion of scenes showing hanging laundry in Shanghai in 'Mission: Impossible III' and the removal of footage containing Chow Yun-Fat that 'vilifies and humiliates the Chinese' in 'Pirates of the Caribbean: At World's End'

160: Cities in China with populations that exceed a million. In the USA there are nine; in the UK just two

80: Percentage of the world's zips produced in factories in the Zhejiang Province city of Qiaotou (amounting to 124,000 miles of zip each year, or enough to stretch half way to the moon). Qiaotou also produces 60 per cent of the world's buttons (15 billion a year), while nearby Datang makes a third of the world's socks. As many as 80 per cent of the world's toys are made in China, which boasts more than 10,000 toy factories

21 million: The number of Chinese-made toys recalled last year by the US toy company Mattel

0: Miles of motorway in 1988

30,000: Miles of motorway today

6.3 million: The number of passenger cars registered in 2007 (compared with 2.3 million in 2004). More than 1,000 new private cars hit the roads every day in Beijing alone

68: The number of crimes thought to be punishable by death in China, including non-violent offences such as tax fraud, embezzlement and the taking of bribes

350 million: The number of Chinese people who smoke (a third of the world’s smokers). Around a million people a year are thought to die from smoking-related diseases

240bn yuan: (£17.3bn) The estimated amount earned by the Chinese government in tobacco taxes in 2005

1.3 billion: China’s population. The country accounts for one in five people in the world 400 million

The estimated number of births prevented by China’s one-child policy, introduced in 1979

22: The number of suicides per 100,000 people, about 50 per cent higher than the global average. Suicide is the fifth most common cause of death in China, and the first among people aged between 20 and 35

700,000: The number of people living with HIV or Aids in China. The UN has warned China it could have 10 million cases by 2010 unless action is taken

45 billion: Estimated number of chopsticks China produces every year, the majority of them disposable. In 2006, Beijing introduced a five per cent tax on disposable wooden chopsticks in an attempt to help save the country’s forests

30: The number of different animal penises on the menu at Guolizhuang, Beijing’s ‘penis emporium’. A yak’s costs about £15, while a tiger’s (which must be pre-ordered) will set you back £3,000

Additional research by George Bull