Currency watch: Chinese growth on the agenda

Last week’s media was full of talk about the Chinese economy, with several commentators speculating when and if it will overtake the US to become the largest economy in the world.

There is always disagreement about when this is likely to happen. Some think it will be 20 years, some think 40, however all are in agreement that it will happen at some point.

China’s year-on-year growth is still progressing in a way which the vast majority of Western economies can only dream of at the moment.

However, this expressway expansion is slowing at the same time that some suggestions of a legitimate recovery are emerging in the West.

In recent weeks, Beijing has reported that it expects growth to average 7.5% in 2012, down from a previous estimate of 8%.

The period of double-digit-progression is now over. China has relied hugely on low-cost manufacturing to provide growth, but now it must change its economy to one that is more consumer led if it is to continue on its journey to the top.

This “rebalancing” may well be a good thing for most Chinese people. The powers-that-be have promised change for years and haven’t yet delivered on these promises.

A move towards a more consumer led society could mean that more ordinary Chinese will get to enjoy the trappings of a free market economy.

That said, while the wealthy will continue to splash out on lavish items, actually changing the mind-set of the middle classes away from one of a savings-led economy to a model based on consumption will take years.

A prime example of this can be seen across the East China Sea; in Japan. Japan has been through two “Lost Decades” of pitiful growth, and while the frugality of the typical Japanese worker did not cause the crisis, the situation was perpetuated by the desire of the average Japanese citizen to hold the purse strings tighter.

China has a lot more room to manoeuvre to fend off a painful slip in growth in the short-term, but concerns will remain as to the speed of the rebalancing and how ready the Chinese people are to adopt the consumer culture that is required to maintain its inexorable growth.

So, as far as its ascent to the top of the global economic league table is concerned, it could be 20 years it could be 40, however with the US economy beginning to recover there’s certainly no guarantee this will happen anytime soon.

Jeremy Cook is chief economist at World First foreign exchange