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Sunday, October 10, 2004

The Miracle Called China

The world economy is cooking. Global output will expand 5% this year,the biggest rise in nearly three decades. The U.S. has pulled out of a slowdown earlier this year and looks set to post 4%-plus growth in the third quarter. China is likely to grow a sizzling 9% this year, and Japan is enjoying its best performance since 1990. Even long-lagging Europe is looking up. The US trade deficit is $600 billion and budget deficit is $400 billion,posing significant threat to the world economy.Over the past decade or so, the global economy has undergone fundamental changes that are conspiring to boost growth while keeping prices in check. These shifts include the continuing productivity revolution in the U.S. as well as the determination of the globe's central banks to keep prices under control. But the mother of all change agents is China -- a rising economic power whose soaring demand is fueling growth across the globe, even as its surge in low-cost manufacturing exports on the back of an undervalued currency is helping keep inflation in check. Credit largely goes to its massive investment in capacity. With investment running at some 45% of gross domestic product, China is adding capacity at a furious pace to make everything from steel to cell phones. Yes, its appetite for materials to fuel those factories is pushing up prices for oil and other commodities. But its exports of cheap consumer goods from those factories hold down inflation in the U.S. and elsewhere.
So far, the reconfiguration of the world economy around the U.S. and China has proved to be a net plus. The change has helped hold down inflation levels even as it promotes global growth. But it has also spawned economic imbalances that will need to be dealt with if the good times are to continue.
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