East meets West: Is China

18th October 2011

While news reports that China's gross domestic product stood at 9.1% in the third quarter, the slowest pace in more than two years for the world's second-largest economy, this is still a figure that Britain could only dream of.

"The national economy generally carried good development state and kept moving towards the expected direction of macroeconomic control," the National Bureau of Statistics said in a statement.

Should the West be concerned?

Despite first theories, the economies of the West and East are, in fact, inextricably linked.

The theory of ‘decoupling' suggested that, while the West was mired in a debt crisis, China and its neighbours would power ahead. Yet this has been discredited as Asia has been dragged down by the West's problems, with slumping stock markets and some economic impact. However, even though the region has been affected, it is still growing, with hefty GDP figures.

Meanwhile, the West's reputation is at risk. In the past the West has been considered a place of enterprise, economic growth and opportunity, but this is being compromised as it is dragged through endless economic woe. The consequences of this may be long lasting, as could a dysfunctional West find itself increasingly isolated and ignored as the world searches for new models?

Mindful Money would like to hear your opinion.

But will China continue to grow?

As China's economy grows so may the internal pressures – they could face the same growing pains the West has been through with increased demand from consumers and mounting debt. Alongside this, the GDP data comes amid fears that a slowdown in the US and Europe's debt crisis may hurt China's growth. But as yet, we don't know.

Is a tame dragon better for the West?

Mindful Money's economist blogger Shaun Richards says: "I would say that China's rate of economic growth is too fast, and may therefore end in a bust, especially as she has embarked on a series of interest-rate rises to try to curb inflationary pressure."

However, whether growth in the future is good or bad for the West depends on imports/exports. Shaun explains: "Some of China's growth was caused by her increase in exports which led to global imbalances, as other countries imported the goods she exported. A consequence of such imbalances was the recession of 2008/09 – but recovery from recession would be helped by China continuing to grow and, fundamentally, if it imported more of other countries' goods."

A different kind of problem

While we wait to see if China will aid our recovery, it is battling another kind of problem. Rather than the fear of the global economy slipping into another recession, China faced a different concern during the past year – inflation.

The Chinese government has given the battle against inflation top priority. With inflation at 6.2% year-on-year in August and at 6.5% year-on-year in July, this is significantly above the 4% tolerance limit set by the government.

There has been a sharp rise in the cost of living in recent months primarily due to food prices, which are responsible for about 70% of the overall increase. These price increases hit the Chinese squarely in the wallet, as more and more are consuming foods higher in protein, such as meat.

However, the recent drop in commodity prices, particularly the sharp decline in the oil price in the wake of a global economic slowdown, is expected to help reduce imported inflation.

So while China overcomes inflationary pressures, how might it intervene in the West's crisis?

Gemma Godfrey, head of research and chairman of the investment committee Credo Capital, and Mindful Money blogger, says: "Interestingly, there are rumours the Chinese are eyeing European infrastructure and sovereign debt, coming 'to the rescue' in return for measures they believe will help the region and re-ignite demand for their products."

China has offered to help fund the Eurozone in exchange for commitments from European countries that they agree to budget cuts and reforms. It is offering to purchase infrastructure assets from countries that are in debt. Chinese banks would also purchase sovereign debt to help prop up countries in the Eurozone.

It is unlikely that European leaders will agree to the plan from China, though elements of it could be used as part of a wider policy to support the euro.

So there is little doubt the West relies increasingly on the East to pave the way to recovery, but what form will this take?

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