China and America: A Time of Reckoning

In his last book, The Bill from the China Shop, Charles Dumas predicted how the Asian savings glut would force-feed US mortgage borrowing to excess. China and America points to the next risks. The current credit crunch is likely to be followed by an economic downswing, led by housing, but with weakened household wealth and confidence prolonging the pain.

Now China's explosive exports are feeding through to overheat the domestic economy. Inflation is accelerating fast. Yet Beijing can only fight it by unpopular repression of domestic demand or finally letting China's yuan soar.

A severe cutback in China's growth (probably after the Olympics) seems likely. If the Chinese authorities allow major yuan appreciation and progressively freer overseas investment, both the Chinese and world economies could rebalance quite easily. But if Beijing maintains a stubborn defence of the cheap yuan and control over its citizens' savings, the global outlook is set to be very much darker.

Charles Dumas has been head of the World Service at Lombard Street Research since 1998 and is one of the world's leading macroeconomic forecasters. He was previously a journalist at The Economist, an economist at General Motors and J. P. Morgan, and then managing director in J. P. Morgan's mergers and acquisitions department in New York.