Jeremy Warner: Excitement, confusion and fear: the reaction to the Chinese phenomenon

China, China, China. The country's prospects, its relations with the rest of the world and its impact on the world economy run through proceedings here at the World Economic Forum like a stick of Brighton rock. Just a little noticed footnote at these meetings of business and political leaders four or five years ago, it is now all pervasive. Everyone's talking about it, no one can ignore it, and like it or not, from China's impact on finite world resources to climate change and the laws of supply and demand, it is transforming the way we live with a speed barely imaginable just a few years ago.

There are a myriad different perceptions of the phenomenon being aired by participants at Davos, the Swiss alpine resort which hosts the WEF annual meeting each year, far too many to rehearse at length here. Yet perhaps one of the most striking comes from Larry Summers, a former US Treasury secretary and now president of Harvard University. He describes the integration of this vast new pool of cheap labour into the world economy as one of the three great economic events of the last millennium - on a par with the Renaissance and the Industrial Revolution.

If the level of excitement, apprehension, confusion and even fear being generated by the Chinese phenomenon here in Davos is anything to go by, he may even be right.

Much the same thing was said five years ago about the internet, and they presumably cannot both be one of the three. Yet looked at together and as complementary influences, as they should be - for it is the internet, above all else, which is drawing previously closed national economies into an increasingly interdependent world - the claim is perhaps an accurate one.

More on China and India later, but first, what have people been saying about their impact on the world's largest economy, the United States? Is the symbiotic relationship that exists between China and the US, a cornerstone of world economic growth in recent years, remotely sustainable?

The pessimistic view is, as ever, best represented by Stephen Roach, the chief economist at Morgan Stanley. He has been cautioning about the growing size of America's current account deficit for more than five years, and his warnings have become something of a feature of these events. Every year he warns in suitably apocalyptic terms that the twin towers of America's trade and budget deficits are about to come tumbling down, with calamitous consequences for the world economy. Yet somehow or other, we seem miraculously to escape the predicted disaster and 12 months later Mr Roach is back, not to swallow his words, but to claim that if the situation looked bad a year ago, it looks even worse today.

Listening to Mr Roach this time around, I thought for one dreadful moment that he was about to change his tune, or at least ease his position a little. On the old rule of thumb that when the last bear turns bullish, it is time to sell, this seemed an extraordinarily bad omen for the health of the global economy.

Of course, Mr Roach said, the avoidance of crisis in 2005 didn't mean the problems had gone away. Investors had drawn the wrong lessons from the failure of his forecast of a disorderly unwinding of trade imbalances. It would be dangerous for them to sit back and think everything was fine.

Yet he seemed curiously unwilling again to forecast turmoil in financial markets. Did this mean he accepted that the emergence of China and India had transformed traditional economic analysis of the sustainability of these imbalances?

That would be going too far, and just to underline the point that there has been no blinding flash on the road to Damascus, Mr Roach predicted that 2006 would be "the year to look out for the end of the great US spending binge", with possibly recessionary consequences. So that's a relief, then. We can sleep easy, confident in the knowledge that there is at least another year of decent growth to come.

The law of averages alone might suggest that eventually Mr Roach will be proved correct, yet these imbalances needn't necessarily end badly, and so long as it suits Asia to sustain them, then there is every possibility they won't.

More likely, as more optimistic participants here suggest, the imbalances will unwind only gradually, with relatively limited impact on financial markets. The very strength of the BRICs mean that the world is better able to cope with a US slowdown than it has been in the past.

Mr Roach warns of the dangers of complacency, and on that at least there is near unanimity. Yet China has almost as much interest in the durability of a strong US economy as does the US itself. It is impossible to believe China would risk growth and exports with a precipitous withdrawal of support for the US dollar. The more measured view, expressed by Laura Tyson, dean of the London Business School, that America faces a slower rate of growth, but essentially another "goldilocks" year, seems about right.

China: who needs the US consumer?

One of the star turns at this year's Davos is Zeng Peiyan, the vice-premier of the People's Republic of China. To listen to his reassuringly upbeat message, anyone would think the world is about to be cured of all known ills. Yet anyone who doubts that China will soon be one of the world's two big superpowers, perhaps the biggest, need only look at a choice few of his statistics and claim to be convinced otherwise.

Over the past 27 years, China has grown at an average rate of 9.6 per cent per annum, reaching a GDP of $2.2trillion last year. This already makes China one of the largest economies in the world.

However, with more than one billion souls, China is still outside the top 100 in the league table of the world's richest nations in terms of GDP per head. In its next five-year plan, from 2006 to 2010, China aims to double this number to more than $2,000 per capita.

At the same time, better social security, improved health cover and easier access to credit should reduce the country's extraordinarily high savings ratio - currently standing at more than 40 per cent of average income - to more normal levels.

The resulting increase in domestic demand should enable economic growth to become self-sustaining, reducing Chinese reliance on the export boom to America and elsewhere which has supported growth to date.

Mr Peiyan also claimed that China was capable of meeting most of its energy needs from internally generated resources.

Plans greatly to expand the supply of nuclear, clean coal, hydroelectric and renewable forms of energy are already well in hand. On Mr Peiyan's analysis, there will come a time, possibly quite soon, when China will be able to dispense with the American consumer as the main driver of growth. Who knows, the trade imbalance may eventually even reverse. It's not as implausible as it might seem.

India: the choice for global investors

China s one thing, but don't forget India, whose contingent here in Davos dwarfs the Chinese presence and is not afraid to champion India's supposed advantages over China as a destination for global capital, not just in the hi-tech industries - China will do the hardware, and India the software, runs the cliché - but in the manufacturing and knowledge-based industries alike.

One of the many advertisements trumpeting India's attractions which bedeck the town reads: "India, the preferred democracy for global investors." If that's not a side swipe at China, I don't know what is. Many investors will find it hard to disagree. India's got its drawbacks in overbearing bureaucracy, still high levels of corruption, and generally poor levels of universal education, but the cultural and linguistic affinity is much higher, and India shares many of the same traditions as the West - a similar business culture, a belief in the rule of laws, and a respect for intellectual property rights which seems to be virtually non-existent in China.

Social conscience takes a back seat

What, no Africa, no climate change, no poverty relief?

Well, there's a bit of that, but after complaints from some business executives last year about how the WEF agenda was being hijacked by do-gooders, there is a much heavier emphasis on business this time around. Gordon Brown, the Chancellor, flies in today to try to rekindle interest in the development story. Yet as business leaders wrestle with the challenge of broadband, China and India, he's going to find it an uphill struggle. Social conscience has again sunk low on the list of priorities.

At least Bono, the Irish rock star, has the right idea. Create a business opportunity which appeals to consumers interested in Third World issues, as he might do with his new brand called "Red", and companies are more than eager to step up to the plate. The reason China and India are growing so strongly, while most of the African subcontinent is not, is because these are societies that have collectively decided to do something about their predicament by creating a business-friendly environment. The rest follows naturally.