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Saturday, October 02, 2004American consumers and Chinese producers have led a global boom. China is creating genuine wealth, but America's binge is based partly on an illusion. OVER the past year the world economy has grown by almost 5%, its fastest pace in two decades. Growth has been powered by two high-octane fuels: America's exceptionally loose monetary policy, which has encouraged consumers to keep spending; and an unprecedented investment boom in China. America and China together accounted for almost half of global growth over the past year. If American consumers and Chinese producers were to retreat at the same time, global growth could slump. In the past three years, China has contributed one-third of the world's growth in real output, measured at purchasing-power parity.Only a few years ago, the term “the world economy” was used as shorthand for the economies of the developed world; China would at best rate a brief mention. But now it is too big to ignore (see chart 2, below). It was largely thanks to China's robust growth that the world as a whole escaped recession after America's stockmarket bubble burst in 2000-01. But its recent boom is also responsible for much of the surge in global energy demand that has pushed up oil prices. China's massive purchases of American Treasury bonds explain why the dollar has not fallen further or bond yields risen more sharply—even though America's huge current-account deficit continues to widen. Last but not least, many people blame the sickly state of America's jobs market on imports from China and on outsourcing.
China is home to one in five of the world's people, and has long been the most populous country on earth, but economically it has started to matter only recently. China's GDP already accounts for 13% of world output (at purchasing-power parity), second only to America's. By the end of this year China will probably be the world's third-biggest exporter (after America and Germany). It is also the largest recipient of foreign direct investment as multinationals have moved operations to China to take advantage of its low labour costs and huge domestic market. It is the new workshop of the world, producing two-thirds of all photocopiers, microwave ovens, DVD players and shoes, over half of all digital cameras and around two-fifths of personal computers.But China is not only a big new producer, it is also a big new market. Its imports grew by 40% last year, and over the past three years it has accounted for one-third of the total increase in world import volumes.Some central banks, slow to grasp the effect of these structural changes on inflation and monetary policy, have been running overly loose policies that have fuelled unsustainable booms in America and some other economies. In the short term, therefore, China could make growth more volatile, but in the long term it will be a powerful engine of global growth. The Black Death is thought to have originated in China and spread to Europe through trade. This time China will export vitality to the world economy instead. Very insightful and really awe inspiring speaking about China.
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