HONG KONG: China leads in Olympic golds, but can it lead the global economy?

For years it has been the world's GDP growth champion but that has been led by exports increasing at more than double the growth rate of the economy. The rest of the world helped pull China along by providing markets for its goods and investment for its factories.

But most of the rest of the world can no longer do that. Unless China (and some smaller, mainly Asian, countries) can now achieve domestic demand-led growth, the world as a whole is in for an extended period of pain in addition to existing financial sector problems. China would surely be a world leader to whom all would be grateful if its export growth fell to 3 percent while its GDP growth remained at 9 percent.

Look at the rest of the world. America's problems are obvious enough. It needs an extended period of under-performance to repair its financial institutions, household balance sheets and its trade imbalance. Euro-area countries and Japan have no external balance problems and limited financial ones, but stability is the best that can be expected from these economies with their cautious consumers and rapidly aging populations.

Britain is in as big a mess as the United States. Australia, with a huge external deficit despite high commodity prices, may soon be worse than either. Oil and other commodity producers with big trade surpluses from Saudi Arabia to Russia and Brazil can continue to grow but cannot spend their income immediately - and need to guard against a sudden reversal in their commodity price fortunes, which is certain to come sooner or later. Meanwhile, energy-poor developing countries like India are finding their growth assumptions severely curtailed.

That really only leaves China and some of the smaller East Asian economies with the ability, at least in theory, to offset to a significant degree the weaknesses and imbalances elsewhere.

Despite being massive importers of energy and other commodities, China, Japan, Taiwan and Singapore continue to chalk up huge external trade surpluses, and Korea has a small external deficit but could easily afford a much bigger one. Yet these countries mostly continue to think in terms of an export-led growth, which is no longer sustainable.

Many in China cling to the notion that without export growth the nation will not be able to maintain the 8 percent or so growth deemed necessary to absorb urban labor-force growth. Hence the continued resistance to a one-off large appreciation of its currency, a move that would reduce the rate of inflation, put an end to speculative capital inflow and boost the real wages of China's workers.

The workers now have a vastly greater future propensity to spend, and hence create employment for other Chinese, than do those in the rest of the world and the U.S. in particular.

China already has much of the investment in factories and infrastructure that can support big additions to local demand. What it needs is a shift from investment to consumption. That may be easier said than done given the lack of state social security provision. But the government itself has a very strong fiscal position, and the power both to offer more social security, create more jobs in rural areas and to take a lead to push for higher wages.

Some exporters will get hurt, but the damage would mostly be to the richer coastal areas where exporting is concentrated. Demand overall would benefit at the expense of a trade surplus that China does not need and corporate profits which have led to investment excesses.

Domestic-led growth in China would also have a positive impact on attitudes elsewhere in Asia, where concern with exporting is almost obsessive and where inflation has, as a result partly of currency policy, flourished.

Almost everywhere in East and Southeast Asia, domestic demand growth is well below capacity, many currencies are undervalued and neither national nor household balance sheets are stretched. Some, like Indonesia and the Philippines, need investment; others, like Taiwan, need increases in consumption.

It is quite possible that with the Olympics out of the way, Beijing will focus on how best to keep the economy growing at an acceptable pace of 8 percent in the face of a global slowdown. But unless it focuses on the real strengths of China's position rather than trying to halt an inevitable (and desirable) fall in export growth, it will demonstrate that it is still a follower, not a leader. The world economy will be the worse for that.