02/08/2005 10:22:40 am
The Economist: How China Runs the World Economy. Everyone know of Chinas rapidly rising global importance. In a few decades, it is said, the Chinese economy will be second in size only to that of the US. But in the latest edition of The Economist, the editorial points out that the Chinese economic impact in the world is already very big. And that is not only in the field of runnig the monetary policy of the US, by keeping the yuan close to the dollar and buing Treasury bonds, thereby keeping them cheap:

"China′s growing influence stretches much deeper than its exports of cheap goods: it is revolutionising the relative prices of labour, capital, goods and assets in a way that has never happened so quickly before. A recognition of China′s profound and widespread impact on the world economy explains various current economic puzzles.

Take, for instance, the oil price. Since the beginning of last year, oil prices have doubled, yet in contrast to previous oil shocks, inflation rates remain low and global growth robust. The answer to this riddle is China. To the extent that oil prices are driven up by strong Chinese demand rather than, as in the past, an interruption of supply, they are less likely to hurt global growth. And the impact of higher oil prices on inflation has been offset by falling prices of all sorts of goods from cameras and computers to microwaves and bicycles?thanks to China. ...

Another oddity is that, while the prices of most goods are falling, house prices are soaring in many countries. Again, enter the dragon. Cheaper goods from China have made it easier for central banks to achieve their inflation goals without needing to push real interest rates sharply higher. This has encouraged a borrowing binge. The resulting excess liquidity has flowed into the prices of assets, such as homes, rather than into traditional inflation.

And, last but not least, there is the conundrum which has puzzled Alan Greenspan, head of America′s central bank: why are American bond yields so low despite robust growth and hefty government borrowing? Part of the answer lies, once again, with China, which has bought large quantities of Treasury bonds to hold down its currency.

Over the coming years, developed countries′ inflation and interest rates, wages, profits, oil and even house prices could increasingly be ′made in China′. How should the world′s policymakers respond to China′s growing economic clout? Trying to halt China′s growth through protectionist measures, as many American congressmen would like to do, would be a disaster, for it would close off a powerful source of future global prosperity.

A better way to deal with China′s growing power would be to give the country a bigger stake in global economic stability. China should be a full member of international economic policy forums, such as the G7 and the OECD. Western policymakers would be wise to remember another Chinese proverb: ′What you cannot avoid, welcome.′"