George Kerevan: For frightening economic strife forget Europe - look to the east

EUROPE continued to be obsessed with its own economic problems this week, which is short-sighted. True, the latest bail-out of the Greeks is too complicated for ordinary mortals to understand, and takes us back to the labyrinthine, off-balance-sheet transactions that caused the credit crunch in 2008.

Yet the real ticking bomb in the global economy lies not in Athens but in Beijing.

The Chinese are doing their best to slow their galloping economy, which is hitting 9 per cent growth and 6 per cent inflation. Beijing's US-educated mandarins are worried about a runaway property bubble and destabilising wage militancy. So interest rates have been jacked up in classical fashion. On Thursday, one-year renminbi lending went up another half point to 6.56 per cent. This is the fifth rise in eight months.

As a result, domestic bank lending has fallen, SMEs are suffering from the sharp credit squeeze and Chinese manufacturing output has suddenly slowed. Shanghai stocks have fallen steadily since their April peak. But there has been another - unintended - outcome, and a dangerous one as far as the West is concerned.

Last year, Beijing quietly cut the renminbi's peg to the dollar, to curb inflation and blunt foreign criticism it was subsidising exports with a weak currency. Since then, the renminbi has appreciated by about 5 per cent. And with rising interest rates, the Chinese currency will go on strengthening, squeezing the export surplus further.

Not everyone in China is happy with this experiment - and remember that next year is scheduled to see a leadership change. Beijing now has its hawks and doves when it comes to further monetary tightening and currency appreciation.

Some want a looser monetary policy to help small and medium-sized companies. This would benefit the so-called "princelings", the well-connected children and relations of the old revolutionary families who control much of Chinese business. They are backed by some technocrats who are worried about the inflationary impact of the foreign capital flowing into China as a result of high interest rates.

But reversing monetary policy is no panecea either. Many Chinese firms have borrowed in dollars to take advantage of a shrinking US currency. A sudden devaluation of the renminbi would be disastrous for them. No wonder there has been a steep rise in hedging against the renminbi in recent weeks.

And Europe thinks it has problems.

Flood the market in a bid to ease prices at your peril

China is not the only part of the troubled world economy trying to upstage Europe.Last month the western economies tried to douse rising energy prices by releasing their strategic stocks of petroleum.

The cheerleader for this price-fixing gambit was Barack Obama, who is desperate to boost US growth and win re-election next year. However, adding to the world's available oil has actually put prices up, not down. Economic undergrads will be answering exam questions on this seeming paradox for a generation to come.

The explanation is simple. Using reserve stocks today means those reserves will need to be replenished later from future production. That means even higher prices in the future. So oil traders are hoarding the extra oil in anticipation of this future price hike.

Result: this week US retail petrol prices were up just as the summer season got underway and air conditioning units were running full tilt. That's what politicians get for trying to outsmart the market.

Not that Washington is all that concerned. Oil was last month's problem. This month, the Democrats and Republicans are seeing who will blink first in a row over raising the Federal $14.3 trillion (8.9tn) mandatory debt ceiling. They have until 2 August to agree or the US government could - very theoretically - default on its sovereign debt. The US Treasury has a $30bn debt repayment due on 4 August.

But don't lose any sleep. Obama can always dip into the family savings. The US Treasury has $400bn in gold bullion while the central bank has $2.6tn worth of bonds and other securities it could sell.

Alternatively, the US government could do what Greece is being ordered to do - sell assets. The federal government owns an astonishing 650 million acres of land. That's 30 per cent of the entire country. It includes no less than 45.3 per cent of California. Selling for about 13,750 an acre, Obama could eliminate the entire US national debt.