The money supply is accelerating exponentially fuelling the fears of the pessimists that the economy is running out of control and already there are signs that the Chinese authorities believe that, as a result, serious inflation is a real threat.

House prices are accelerating, particularly in the luxury bracket, on top of an increase of three-quarters in house sales in 2008. Food price and wage inflation are also stalking the land on the back of the surge in money supply and concerns about bubbles in asset values.

If the Chinese authorities get cold feet and slam on the brakes the knock-on effect will impact all the major economies of the world bringing a new threat to a worldwide trade picture which has already been severely battered by the credit crunch.

The authorities have already called for a moratorium on bank lending for the early part of the year as lending accelerated to unprecedented levels during the first two weeks of the year at $160 billion. If lending had continued at that level there was a risk that it would triple from last year's record, which itself was already double the level of 2008 at renminbi (RMB) 9,600 billion. In an effort to rein in the banks the Beijing government has started to increase the size of banks' reserves so that they have less cash to lend.

But that may not be sufficient to stop Chinese industry trying to dump ever-increasing volumes of cheap goods on a world that is only just now starting to recover from a binge of over-borrowing and over-spending.

Indeed China's Vice-Minister of trade, Zhong Shan, has already declared that his country will continue to increase its share of world exports and that contention was underscored in December when Beijing's exports were higher than the year earlier period after more than a year of declining figures with a fall of 17 per cent for last year as a whole.

The astonishing rise of Chinese exports can be gauged from the fact that the nation has now overtaken Germany as the world's largest exporter as its share has risen to 10 per cent, up from 3 per cent in 1999.
If, as many foreign governments hope, China's cash flow is diverted from producing cheap exports into domestic infrastructure such as more airports and other expensive projects that will only likely leave the banks with more under or non-performing loans.

If the brakes do go on will it all end in tears with the Chinese economy screeching to a halt with foreign trade disputes bubbling up here and there as the nation tries to export its way out of trouble? Commentators are divided.
By all classical measures China does look to be headed for trouble but with the urban, consuming public at just 47 per cent of the national population and nowhere to go for their exports except out into an increasingly anxious world struggling to compete against their extraordinarily low prices.

In truth there is a lot of work to do at home with levels of development a good 60 years behind even the late arrivals in the league of developed countries. Vast amounts of cash could be channelled into regeneration of the nation and its infrastructure. Many urban areas are still at a primitive level, lacking proper water supply, sanitation and other modern amenities and would benefit greatly from upgrading.

In the past the government has placed greater emphasis on building its export industries and China's status in the world. It has shied away from building up excessive domestic infrastructure expenditure fearful, in part, because of concerns that such expenditures could accelerate the slide to higher rates of inflation.

The Chinese authorities now seem to recognise that they need to pay more attention to improving the lot of their people, more and more of who are travelling abroad and gaining a sense of what they lack in terms of the standards of everyday living. Increased opportunities to travel abroad saw the Chinese middle classes spend an amazing $42 billion on tourism last year, some $4 billion more than visitors to China spent. 

From initial individual permissions to travel only to Hong Kong, Macau and Taiwan a programme called Approved Destination Status has grown from its initiation in the early 1990s to include more than 100 countries. The U.S. eased its visa policy in June last year and other nations, particularly in Southeast Asia, are following suit to benefit from this splurge of Chinese wealth into the outside world.

That outflow of Chinese wealth will go some way to alleviate the accelerating trade imbalances with the rest of the world but the stage is being set for a new round of U.S.-Chinese tension unless there is a dramatic turnaround in the fortunes of the American economy in the coming months.

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