It is so nice when a consensus forms among economic commentators. There is going to be a recession in America, the pack says, and probably in Britain too, for they have both sinned with their debt, deficits and soaring house prices. But the world as a whole won’t suffer, as the great emerging economies of Asia — China and India — will carry on booming regardless. News that China’s output expanded by an extraordinary 11.4% last year, its fastest rate for 13 years, only strengthened this view.

When a consensus is so clear, it is always time to wonder whether it might be wrong. That contrarian instinct was reinforced this week by the way that Asian stock markets, including those in Mumbai, Shanghai and Hong Kong, reacted to markets in America and Europe by going through wild gyrations of their own. A widely followed measure of such shares, the MCSI Emerging Asia Index, was at one point last week down 25% from its October high.

Why should that be, if Asia is just going to boom on regardless? The answer is, in part, that stock market traders are wild, emotional creatures, and we risk going mad if we try to understand their every move. But another part of the answer is that the sanguine consensus is likely to be only half right. The half that is wrong offers good reasons for concern about Asia.

Where the consensus is likely to be wrong is in its implicit assumption that these Asian economies are not going to be facing problems of their own. Chief among those problems is inflation.Rising prices for food, energy and other commodities, partly caused by strong Asian

demand, lie behind the high interest rates and inflation worries that were spooking the Bank of England, the European Central Bank and, until its big interest cut this week, the US Federal Reserve. They are also a big worry for India and, even more so, China.

Consumer-price inflation has topped 6% in China. Wages are rising rapidly.

The last time inflation got badly out of control in China was in1988-89, which encouraged workers to join the student protests in Tiananmen Square.

To avoid any repeat of that, government policy is beginning to change. The currency is being allowed to appreciate more rapidly against the dollar, thus reducing import prices. Interest rates are being raised. The revaluation is likely to accelerate, the clampdown on credit growth to get tighter. The danger is that China’s investment bubble could then burst.

The best parallel for China today is Japan in 1970. At that time, Japan had been using a cheap yen to boost exports, cheap capital encouraged an investment boom and environmental degradation prompted popular protests.

Then, in 1971, Japan was forced by Richard Nixon to revalue the yen, and in 1973 the global oil shock brought inflation. The result? Not in fact a disaster for Japan, but a wrenching change: revaluation and rising industrial costs forced the economy to shift from the era of the motorcycle to that of the microchip.

China faces the same sort of pressures now: currency revaluation, inflation, environmental damage. It now needs to move its economy sharply upmarket. As Japan showed during the 1970s, it can be done.

But it won’t be easy. Which is why those stock market traders in Asia were right to turn a bit wild and emotional this week. — The Guardian