COMMENTARY
Commentary: Leading the World in Economic Growth
January 10, 2008
Christopher Bjorke, AFP

Thank goodness for China.

The new year is not shaping up to be one of high hopes for the global economy. The outlook is modest growth in spite of troubles -- the sinking U.S. dollar, the rising price of oil, the extent of subprime losses -- that could make things much worse. The World Bank has projected growth to be 3.3%, down from 3.6% in 2007 and 3.9% in 2006.

Growth in the United States is expected to barely scrape 2%, though the more pessimistic fear a recession. The Euro Area is expecting a similar expansion.

Then there is China. While not reaching the dizzying 11.3% growth it enjoyed in 2007, it is expected to achieve a respectable 10.8%.

The East Asia and Pacific region as a whole is projected to grow by 9.7%. South Asian growth is expected to be 7.9%, with India growing by 8.4%, according to the World Bank.

While the United States and the European Union are in the doldrums, the developing world has been able to pick up some of the slack.

"Assuming that China continues its double-digit growth and that the authorities succeed in dampening overheated sectors, GDP growth in East Asia should slow gradually to 9.7% in 2008 and to 9.6% by 2009," the bank said in its report.

A needed boost

The contributions of China and other developing countries are a welcome lift during a slowing trend. However, China faces challenges of its own, despite its stellar growth projections.

One of these is rising prices. Beijing recently raised key interest rates for the sixth time in the past year to hold down inflation, which reached 6.9% in November, the Financial Times reported.

Michael Mussa, senior fellow at the Peterson Institute for International Economics, wrote that accelerating inflation is an inevitable result of the country's growth.

"The fact is that it is very difficult to maintain monetary control when the country is being flooded with gigantic inflows of foreign exchange reserves that are the consequence of resisting currency appreciation in face of both massive (and growing) current account surpluses and large capital inflows," according to Mussa.

Another concern is the perception that China's equities are overvalued. A number of banks have advised investors to reduce their exposure to Chinese stocks, the South China Morning Post reported. The Xinhua Finance/Milken Institute's IPO indicator also showed its second-largest decrease in a decade, reflecting fears of a bubble.

Neither of these issues will necessarily derail China's progress, but they will likely usher China toward more down-to-earth growth.

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