Perhaps it's not hyperbole to suggest that China is the greatest economic growth story ever told. Its economy grew at an average annual rate of 10% from 1981 through 2006, an unprecedented achievement. And the country is expected to crank out more double-digit growth this year and maintain its robust pace over the next decade or so as its export machine produces higher-margin goods and its huge domestic market of 1.3 billion people earn more money and boost their personal consumption.

The U.S. remains the reigning global economic titan, having gradually attained its preeminence over a few centuries' worth of manifest destiny that was nurtured by the ideas of Adam Smith, blessed by abundant natural resources and fueled by hungry immigrant labor.

In China's case, the country was an economic mess after Mao Zedong launched the ill-fated Great Leap Forward and Cultural Revolution programs during the 1950s and '60s, twin disasters that, among other things, mandated peasant communes to make steel in backyard furnaces and exiled some of the country's brightest minds to shoveling manure on collective farms.

But in the roughly three decades since Deng Xiaoping launched economic reforms that awoke the sleeping giant, China's growth has significantly impacted the global economy in many ways. It is a sponge for foreign investment and a magnet for jobs that have been displaced from developed nations, leading to calls for protectionist measures in the U.S. and elsewhere. It is a voracious consumer of raw materials whose appetite played a big role in the spike in global commodity prices. And it is a heavyweight in geopolitics, as well as economics, to the point where social activists are calling for a boycott of the 2008 Beijing Olympics unless China uses its influence to pressure its trading partner, Sudan, to end the Darfur tragedy.

Meanwhile, China has made investors lots of money in recent years. And many observers believe the growth story should continue for the foreseeable future, though not without a bumpy ride for investors. Indeed, investors were jolted by the global aftershocks after the two sudden, precipitous drops in the Chinese domestic stock earlier this year. China has lots of moving parts, and despite mind-boggling growth it remains a work in progress.

"China is growing like the dickens but is poor as dirt," says John Rutledge, an economist and the chairman of Rutledge Capital, a private equity investment firm that invests in China. He notes that China's average income is less than $2,000 a year, and that the vast majority makes less than $300.

"It has all of the problems associated with rapid changes in opening up a country" that has shifted from totalitarian communism to capitalism, says Rutledge, citing such problems as corrupt local government officials and rampant pollution. The latter takes a toll both on human health and on economic growth because of medical costs and damaged crops. "To keep the machine rolling," he says, "it needs to maintain social stability. And to do that the government must keep delivering growth by bringing in foreign capital."

Growth isn't a problem-China's gross domestic product grew 11.9% in the second quarter, an 11-year high. China overtook Great Britain as the world's fourth-largest economy in 2005, and at its current pace could pass Germany for third place as early as this year. But the government fears the economy is expanding too fast, and it's trying to slow it down enough to prevent overheating and inflation. Annual consumer price inflation rose to a nearly three-year high of 4.4% in June, much of that due to rising food prices. That was almost two percentage points higher since the start of the year.

China raised interest rates in July for the fifth time in 15 months, and has lifted the bank reserve ratio a handful of times this year to curb lending activity and reduce liquidity. It has launched or plans to launch various other cooling measures that range from targeting rebate taxes on exports to reducing the tax on interest income to encourage people to boost savings and reduce spending.

But restrictive monetary policy and excessive belt tightening could go too far in restricting growth. Another conern is that policy-makers need to monitor the nation's growing urbanization as job seekers empty out rural regions in search of factory jobs in the booming coastal cities. "They need infrastructure that links together different areas of the country so they don't disenfranchise other regions," says Hugh Simon, the Hong Kong-based chief executive of Hamon Investment Group, the sub-advisor for the Dreyfus Premier Greater China fund.

First « 1 2 3 4 » Next