Outlook: Worries over China

WHENEVER the G7 finance ministers are meeting, as they are in London today and tomorrow, Asia manages to push itself to the top of their agenda. The ministers are here to agree a report on the region's troubles which is to be delivered to heads of government in Birmingham in a week's time. With more rioting in Indonesia, new question marks over the Japanese economic revival package, and a fresh slide in the region's share prices and currencies, what should its conclusion be?

So far there has been so little spillover from events in Asia to the western economies that a powerful magnifying glass is needed to spot it. Trade deficits among the G7 will be higher and inflation lower than otherwise. But this has come to be seen as good rather than bad news, for without a bit of a chill from Asia, the overheating US economy would need to have been cooled with an early interest rate rise.

This lack of contagion ought to come as little surprise, for all the professional gloom on the part of publicity-seeking pundits. For example, UK exports to South East Asia are equivalent to exports to Ireland.

Besides, there is little overlap between goods imported from Asia and goods produced at home. So the huge devaluations of the rupiah, ringgit and baht will not crowd out Made in Britain labels from the high street and should make British retailers and consumers better off. Fears of dumped consumer goodies harming UK plc seem to be misplaced, if only because we don't make our own any more.

Japan's stagnation is more worrying for world growth prospects. No doubt the Japanese Finance Minister will get another ear-bashing from his colleagues this weekend. This is a bit unfair because the policies the Americans and others are urging on Japan are precisely those they have renounced themselves. It is hard to imagine Gordon Brown prescribing huge tax cuts and whacking great increases in public spending for the UK economy when it slows down. Nor is anybody sure that these policies will do the trick, making this course even higher risk given that Japan has the worst long- term fiscal position of any of the G7 economies.

However, the biggest worry of all must be what happens to China. Fears that this economic giant will become destabilised as a result of the Asian crisis have resurfaced. The Chinese economy is so big that any pronounced slowdown or recession might impinge noticeably on the rest of the world. More frightening still would be political instability triggered by economic and financial turmoil. The prospect of civil war in Indonesia is alarming enough, but upheaval in China would really give the G7, not to mention Wall Street, something to worry about.