Emergic: Rajesh Jain's Blog

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China and the World Economy

October 2nd, 2004 · No Comments

The Economist writes in a survey that “American 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.

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. 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 sharplyeven 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.

This survey will explore the many ways in which China’s rapid economic development is affecting the rest of the world, from jobs and growth to oil prices and inflation. The integration of China’s 1.3 billion people will be as momentous for the world economy as the Black Death was for 14th-century Europe, but to the opposite effect. The Black Death killed one-third of Europe’s population, wages rose and the return on capital and land fell. By contrast, China’s integration will bring down the wages of low-skilled workers and the prices of most consumer goods, and raise the global return on capital.

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.

Tags: Emerging Markets

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