FAR from taking over as the engine of growth from an exhausted West, China is making matters worse.

Its policies continue to play havoc with global trade and risk tipping the world into a second leg of the Great Recession.

“The inherent problems of the international economic system have not been fully addressed,” said Chinese President Hu Jintao. Indeed not.

Not when China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.

While some fret about liquidity-driven inflation, the greater danger is that record levels of idle plant almost everywhere would feed a downward spiral of job cuts and corporate busts, according to World Bank chief economist Justin Lin.

“I’m more worried about deflation,” he said.

By holding the yuan to 6.83 against the United States dollar to boost Chinese exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, said Nobel laureate Paul Krugman.

As long as China does it, other tigers must do it too.

Western capitalists are complicit, of course. They hire cheap workers and rent cheap factories in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

At some point, American workers will rebel. US unemployment is already 17.5 per cent under the broad U6 gauge followed by President Barack Obama.

Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression.

A backlog of 7 million homes is awaiting likely seizure by lenders. If you are not paying attention to this political time bomb, perhaps you should.

Mr Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears.

“We have reached one of those rare inflection points in history where we have the opportunity to take a different path,” he said.

Failure to take that path will “put enormous strains” on the US’ ties with China. Is that a threat?

It is fashionable to talk of America as the supplicant. That misreads the strategic balance – there is no symmetry here.

Any move by Beijing to liquidate its holdings of US Treasuries could be neutralised – in extremis – by capital controls.

If provoked, the US has the economic depth to retreat into near autarky (with the North American Free Trade Agreement) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference.

In such circumstances, the Chinese economy would collapse.

Mr Hu sounded conciliatory last week. China is taking “vigorous” steps to cut its reliance on exports, still 39 per cent of gross domestic product.

“We want to increase people’s ability to spend,” he said.

Beijing is indeed boosting pensions and extending health insurance to the countryside so that people feel less need to save, but cultural revolutions take time.

The reality is that much of Beijing’s 4 trillion yuan ($812 billion) stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.

Credit has exploded to the point of being absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53 per cent this year.

Once you know that Hunan authorities have torn down two miles of modern expressway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.

Lending has touched 140 per cent of Gross Domestic Product, according to Pivot Asset Management, “well beyond” levels that have led to crises in the past. With the revolution’s 60th birthday out of the way, the central bank has begun to tighten. New yuan loans halved in October. So be careful, Pivot said. A hard landing in China could prove as traumatic for world markets as the US sub-prime crash.

The world economy is still skating on thin ice. The West is sated with debt, the East with plant capacity. The crisis has been contained (or masked) by zero rates and a fiscal blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough demand to compensate. It is adding supply.

My view is that markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China’s investment bubble and Europe’s banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle. The Daily Telegraph