The growth of the Chinese economy, which is heavily based on international trade, has recently become so rapid that it has driven up shipping costs and raw materials prices. A recent Wall Street Journal article noted that bulk carriers that could be chartered for $25,000 per day at the beginning of this year now bring $75,000. This increase in shipping costs to record levels has been largely caused by rapidly growing Chinese imports of iron ore, soybeans, steel and a variety of raw materials and semi-finished products. Chinese imports of iron ore have increased by 33 percent in the last year to an annual rate of 40 million tons.

This explosion of demand in China can be expected to rebound against the country through higher export costs and prices. If China imports inputs for industries, which then export to the United States, it faces two sets of higher costs. First, it pays more for the imports, due to shipping costs, and then it must pay more for shipping to the U.S. West Coast. The second half of this cost problem will be minor for items, which are light relative to value, but for anything that is heavy and bulky relative to value (clothing, textiles and shoes), it may be more than a minor problem. This spike in shipping costs has the same effect on Chinese exports as a modest increase in our tariffs on their goods.

The boom in China has also driven up raw materials prices in producing countries, which will add to inflation. The Economist index of all commodity prices is up by 14 percent during the last year, with metals prices having increased by 23 percent and non-food agricultural items, such as fibers, by 28 percent-so much for the threat of deflation. China is creating a potential renewal of worldwide inflation, which means that Alan Greenspan may have to raise interest rates in the not so distant future.

The growth of the Chinese economy since the market reforms of the early 1980s is truly stunning. China has gone from being extremely poor to a per capita GDP level, at purchasing power parity, of almost $4,500 per person. Never in the history of economics have so many people moved from poverty to a reasonable standard of living so quickly.

Export growth has been a large part of China's success, but there has also been a boom in plant and equipment investment, and a more recent explosion of domestic demand for consumer durables. China is expected to be the third or fourth largest national market for autos, if highways can be built rapidly enough to keep them from becoming parking lots. When local demand calms, China can be expected to export cars.

An economist of decidedly conservative views recently spent a month touring China and said upon his return that he had never seen capitalism in such a raw and energetic form. How Mao and his colleagues could have thought that the culture of China would produce good socialists is beyond understanding. The Chinese adapt to market economics like bears to honey.

Are there any major problems in the Chinese economy that could cause a slowdown or worse? Yes. Their greatest weakness is the commercial banking system. For decades, the government in Beijing has been determined to avoid showing the enormous financial losses of state owned enterprises as a cost on its budget, and has therefore "encouraged" the four large banks, which are also state-owned, to make large loans to these enterprises. Now, these loans are uncollectable, but the banks cannot write them off without risking insolvency. In addition, these banks are now making new loans at a rapid pace, with consumer financing for consumer durables (Buicks and BMWs) as a major activity. Any slowdown would make these loans doubtful, and result in larger losses for the banks. China's banks almost resemble the U.S. savings and loans sector in the late 1980s.

Beijing understands that its banks are in big trouble, and is trying to straighten them out, but, results have been very limited thus far. A major reason for Beijing's resistance to suggestions that it eliminate controls on foreign investments by Chinese residents is fear of a run on deposits at the four large banks. It could now be dangerous for Chinese residents to be free to move funds to British or U.S. banks.

This is not merely an issue for China, but also for the world economy, particularly because a banking crisis in China could encourage a run on deposits in Japan, where banks are also weak enough to raise questions of solvency. A two-country banking crisis in Asia would create huge problems for world prosperity.

China's economy is now so large that we all have a stake in its continuing success. China buys and sells so much in world markets that if its performance were to falter we would all be in trouble. We will just have to hope that Beijing can successfully reform it banks so that its economy will represent a long-term boom rather than a bubble.