to the challenge posed by china ’ s rise. 1 i believe that this impression has more to do with the specificities of the institutional setting of europe than with a lack of awareness and initiative from individual european policy makers. to be sure, today i will mainly take a european perspective on china. in doing so, i will first deal with two global aspects of the emergence of china that are of particular interest to my institution : its potential impact on ( i ) inflation dynamics and ( ii ) the patterns of international capital flows. i will then focus on ( iii ) the growing economic ties between europe and china and their implications. finally, i will conclude by providing a few comments on ( iv ) the constructive relations of european policy makers, including the european central bank ( ecb ), with our chinese colleagues, in the broader framework of international policy cooperation. see “ the china trade syndrome ” in the charlemagne section of the oct 4th issue of the economist. 1. two important channels : inflation and capital flows the growing weight and impact of china on the global economy has become an indisputable fact that no policy maker or business leader can ignore. china overtook the uk to become the fourth largest economy in the world in 2006 in terms of nominal gdp and is already the second largest economy when measured in ppp terms. according to the latest imf projections china could overtake germany in 2008 and become the third largest world economy after the us and japan. in terms of contribution to global gdp growth in 2006, china accounted for 11. 2 % of global real gdp growth in 2006, compared to 14. 5 % for the us. on the basis of its relative weight in ppp terms it accounted for 31 % of global real gdp growth compared to 10. 4 % for the us. it will not surprise you if i start by addressing the implications for price stability. although money and monetary policy ultimately determines inflation, globalisation seems to have embedded some effects on inflation in the short term. this takes the form of a two - sided coin. the doubling, from around 1. 5 to 3 billion, of the global labour force after the fall of the berlin wall – with new workers coming from formerly planned economies in the 1990s and then from population giants such as china – has exerted downward pressure on import prices of manufactured goods and on wage demand in mature economies, also compressing firms ’ price - cost mark - ups. but there have been other, opposite forces : certain resources, such as oil

and minerals, have become relatively scarcer given the increasing demand from emerging economies. accordingly, this has been a source of upward pressure on headline inflation in the past few years. for these reasons, measuring the overall short - term impact of emerging countries on inflation remains a challenge. this becomes even more difficult when trying to disentangle the specific effect of china on recent price developments in the euro area. in this regard, what we can, at present, say with a sufficient degree of confidence is that there has been a downward chinese effect on euro area manufacturing import prices via both the increasing share of chinese imports in euro area imports – an issue on which i will come back later – and the relatively lower prices of chinese goods. based on highly detailed data disaggregated both by sectors and countries over the period 1995 - 2004, the level of euro area import prices from china and the new eu member states are estimated on average to have been substantially lower than the price of imports from more mature economies. overall, it is estimated that the increase in import penetration from low - cost countries over this period may have dampened euro area import prices for manufactured goods by an average of approximately 2 percentage points each year, an effect almost equally accounted for by china and the new eu member states. most recently, however, a noteworthy feature of the chinese economy has been a significant upturn in domestic inflationary pressures, with consumer price inflation increasing from 1 % in july 2006 to 6. 2 % in september 2007, largely on account of higher food prices. this has been coupled with some increase in chinese export prices in recent months. nonetheless, ongoing and expected developments in domestic prices and costs in europe and china suggest that potential increases in import prices in the euro area originating from this country remain relatively contained. in particular, the ongoing rise in import shares from china combined with its continuing lower price levels should on the whole continue to put downward pressure on euro area import prices. a second dimension of particular interest to the ecb concerns the current configuration of international capital flows and its global and domestic implications. a group of less than twenty emerging countries – especially china, but also oil exporters, russia and a few other economies in asia – have become, so to speak, the “ financiers of the world ”. they are indeed large net savers with hefty current account surpluses. china ’ s surplus, in particular, has increased very rapidly in recent years, from 1 - 3 % of gdp