Beware of the dragon

China has been cited as the emerging superpower of the 21st century that holds the silver bullet to the current economic crisis. But is this a realistic claim to make? And shouldn’t we be wary that dependence on a country renowned for its heavy-handed regulation could actually jeopardise the West’s path towards long-term recovery? Money takes an in-depth look at the real economic power China holds and whether Gordon Brown’s belief that China will provide more opportunities for British businesses “than any other country” should be welcomed.

Mr Wen’s recent visit to Downing Street followed a busy week for the Chinese premier, whose ‘tour of confidence’ took in Spain, Germany and Davos in a bid to promote his country’s economy. And in many ways we should welcome China’s willingness to play its part in the recovery; it can certainly afford it. The £400 billion fiscal stimulus that was announced by Beijing authorities in November will help British exports to China, while the recognition of a need for greater cooperation in tackling the crisis, alone, indicates an improvement on the quiet isolation it often likes to luxuriate it. But it is precisely this last point that should raise our suspicion. Until now, it was unlike China to make such an offer, which raises the question why now? The answer lies in the source of China’s economic power.

For years, China’s growth has been fuelled by America’s consumer boom and widening trade deficit. But now that America has returned to thrift – and, it seems, for some years to come – China’s, and indeed Asia’s, export-led growth is about to reach its limits. This unhelpfully comes at a time when China’s domestic spending is beginning to fall. Both the surge in food and energy prices as well as an overzealously applied monetary policy have acted to reduce domestic demand. This runs the risk of unemployment and already, China’s leaders are struggling to sustain its celebrated middle class, let alone arranging reemployment for an estimated twenty million redundant migrant workers.

In which case, what has China got to contribute? Well if – which is still a big ‘if’ – China fully implement its stimulus plans, domestic demand could start to recover in the second half of this year even if exports remain weak. In which case, average growth might only fall to 4-5% in 2009 as a whole. And yet, this is still half its pace in 2007 and the slowest rate since the Asian financial crisis. And for an economy that has been built upon an expectation of sustained levels of American injections, it is uncertain whether China can therefore provide a silver bullet at all.

This worryingly suggests that China’s rebranding exercise actually conceals an underlying self-interest. For despite seeking to “work together”, accusations of particularly “currency manipulation” have already been levelled at the Chinese government. Team Obama has been especially critical and – in anticipation of Chinese resistance – have packed the US’ own stimulus package with several “Buy American” measures that demand government spending should be on American goods.

The West, it seems, are already falling into this trap. Despite their previous commitments to freeing up trade, Obama’s conditioned bailout, coupled with Brown’s own “personally commitment” to protect British jobs for British workers provides China with the crucial legitimacy its government needs to continue its self-interested trade war. This in turn will allow it to use the threat of its undervalued currency to force the US to lift tariffs and thereby divert trade back to China once more and, crucially, out of the US.

The global coalition that Brown is amassing therefore needs to avoid this protectionist line and carry on pursuing the globalist ideals he announced at the end of last year. For it is only through collective action that the world can avoid the damaging effects of global economic imbalance.