The following article about China reminds us, if we need reminding, that the Chinese economy continues to grow at something like 8% per annum -- that is, at roughly three to four times the rate of a typical western advanced economy, even when the latter is working well. More startlingly, as Jeremy Warner tells us, manufacturing production in China has gone up 16% in the last six months!

If you ask an economist how and why China and the rest of the east Asian countries are able to grow at such rates year after year, he (or she) will reply "Because they have a lot of catching up to do."

But this is begging the question. It's no answer at all. We all know that they are catching up or we wouldn't have asked the question. Besides, who are doing the 'catching up'? Is it governments? Or the entrepreneurs? Or the people? Of course, none of them is trying to 'catch-up'. None of them have any means of knowing on a daily, monthly or even annual basis (until after the event) whether they are 'catching up' or not. Economic development is not a race. Nevertheless, something is happening. There's some extra vitality in those east Asian countries which we have either lost or never had.

The answer, of course, lies with the cause of all economic growth -- the customer. The customer in the Asian countries is buying as many Status Goods as he can and as quickly as he can. Unlike customers in the western countries who have bought Status Goods as they appeared one by one over the course of the last 200 years of the industrial revolution and incorporated them successively into their culture as ordinary possessions, the Asian customer is seeing the whole catalogue of brand new Status Goods simultaneously.

No wonder Asians work hard. Firstly he has to make what are Status Goods to him, and what are ex-Status Goods to the western customer as efficiently and cheaply as he can in order to receive export earnings so *he* can buy those that are not exported. Secondly, because he can see *all* the Status Goods at one fell swoop, he wants to buy them *now*, or at least within his own lifetime -- not spread over several generations as western customers have done.

Of course, when the Asian customer finally manages to buy all the Status Goods of the west -- as the Japanese have done -- then they are in the same predicament as westeners are today in not knowing what else to spend their money on, or else they haven't got the time or energy available to spend in using any more goods because they are so darned tired travelling backwards and forwards to work every day and, besides, TV takes care of whatever few hours they have left for leisure . Well, there we are then. That's the problem that politicians in Japan, Europe and America face right now. That's the problem that Mervyn King, Alan Greenspan and all the rest of the Central Bankers have. How can they stimulate demand when interest rates are already so absurdly low?

(I can't resist quoting Jeremy Warner from another article in yesterday's Independent. He wrote

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"One minute the US Federal Reserve is warning us about the threat of deflation and the use of "unconventional measures" to combat it, the next it is looking forward to a robust second-half recovery and dismissing "situations requiring special policy action" as "most unlikely to arise". Has Alan Greenspan, the chairman, utterly lost the plot?

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Anyway, back to an article about China which I'm putting into my database and which some of you might find interesting.

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CHINA SYNDROME SPELLS BIG CHANGES FOR WESTERN ECONOMIES

Jeremy Warner

As the Chancellor and his advisers peruse another set of dire trade figures announced earlier this week, complete with the news that Britain's trade deficit has been understated by nearly £23 billion over the past four years because of so called "carousel fraud", they may or may not take heart from the astonishing export growth that continues to be generated out of China.

Notwithstanding the Sars epidemic, which over the past three months has brought large parts of China's economy to a virtual standstill, or indeed the present hiatus in world trade, Chinese exports were up nearly a third in June on a year earlier. In the first half of the year industrial production was up 16.2 per cent on the same period last year The Chinese development story, it would appear is still steamrolling all before it.

Well done, you might say, but how's that relevant here in Britain? As things stand, China's soaraway economic growth is still of quite limited significance to the West, but its impact is becoming greater by the day and eventually the consequences are likely to be profound. China accounts for less than 3.5 per cent of world GDP in nominal terms, yet its population is nearer 20 per cent of the total.

China's determination to bring those percentages into balance should not be underestimated, and whereas some of the difference can be bridged through superior economic growth over a prolonged period of time, by no means all of it will. The exceptionally tight time frame China is setting for economic transformation suggests that at least some of the rebalancing would have to come at the expense of maturer, developed countries.

For the time being, the process shouldn't pose too much of a threat. Rapid industrial development means that imports of capital equipment, raw materials and energy are growing even more swiftly than exports. Ironically, one of the major current beneficiaries is Japan, the country that perhaps has more to fear than any other from Chinese industrialisation. On one level, then, we should be welcoming China's development story as one of the few bright spots in an otherwise poleaxed world economy But whatever the short term boost to trade, the longer term consequences are likely to prove alto1 gether more disruptive.

It is almost impossible to exaggerate the scale of China's ambition. Just remember that less than 200 years ago, China was the largest ' economy in the world, with around 30 per cent of global GDP. The eventual aim is to get back to that pre-eminent position. The immediate target is to quadruple GDP to about $4 trillion by 2020, nearly as big as Japan's present GDP. When you take account of the fact that 65 per cent of the population still eke out a peasant existence from the land, you begin to see the scale of the challenge. In advanced industrialised nations, the proportions are the other way round, with only 30 per cent of the population still agrarian based. China plans to achieve this reversal in 20 to 30 years. It took

Britain 300 years to achieve a similar transformation, and even the US took 100 years. It scarcely needs saying that there are a lot more Chinese to migrate from countryside to town than ever there were Brits.

China must decide for itself whether such rapid urbanisation is the right approach to development, but already the price deflation that the creation of such large amounts of new industrial capacity is bound to imply, is making itself felt right across the globe. At a recent conference it was put to Sir Howard Stringer, head of Sony Corporation in the US, that all Sony's production capacity would be located in China within 10 years. "Never mind 10 years, about 10 minutes more like", he said.

China as the factory of the world has profound implications, not just for jobs in the West, but for prices, growth and economic development in the West more generally. Eventually purchasing power in China will improve sufficiently for economic growth to be driven primarily by domestic demand. But that point is a long way off, and in the meantime China must export the fruits of its development story to the West to survive. Good for China's trade figures, bad for ours.

Independent 12 July 2003

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