Paris burned; the oil price reached new peaks; Alan Greenspan, the Federal Reserve Board chairman, spoke of the "conundrum" of low interest rates; global "imbalances" increased; Mexico struggled; and China's exports of textiles and clothing came under renewed restrictions. What links these very different events? The answer is: the China shock. The world economy is undergoing a revolution, as a China-led Asia returns to its historic role at the centre of affairs.

With an aggregate population of more than 3.3bn, the developing countries of east and south Asia contain more than three times as many people as today's high-income countries. The collapse in the cost of communications and the worldwide opening of markets, the two driving forces behind contemporary globalisation, multiply the impact of these numbers on the global economy.

What does economics suggest might be the consequences of the entry of these huge supplies of cheap and hard-working labour on to the world economy? The answers include: a worldwide decline in the relative price of labour-intensive goods and services; a rise in the relative price of commodities, especially where their demand is most affected by industrialisation; a decline in the price of unskilled labour against that of capital, both physical and human; and an increase in global competition.

With big changes in relative prices also come large shifts in the global distribution of income, from spenders to savers. That is at least part of the explanation for the worldwide savings glut, the rising external "imbalances" and Mr Greenspan's celebrated interest rate conundrum.

Note, in this light, six intriguing features of the world economy.

First, according to a stimulating book from Raphael Kaplinsky of the Institute of Development Studies at Sussex University: "The surge in [China's] export growth after the mid-1980s was accompanied by a significant fall in China's terms-of-trade of around 25 per cent."* The fall in the relative price of China's exports was greatest in its trade with Japan, the European Union and the US, as it moved into exports of low-technology manufactured exports. Supplying cheap manufactures is China's big benefit to the rest of the world. But China, too, has gained, by making up in volume for what it has lost in price.

Second, commodity prices have surged after a long period in the doldrums (see chart). Deflated by the export prices of the high-income countries, oil prices hit levels as high as at the peak of the second oil shock, 26 years ago. According to the International Energy Agency, between 2002 and 2005, 43 per cent of the incremental demand for oil came from Asia including 28 per cent from China, which was more important, on its own, than the whole of North America. Similarly, the real price of metals has reached levels last seen in 1989. Even the real price of foodstuffs has stabilised after a lengthy decline.

Third, the share of profits in the value added of the business sector has reached exceptional levels in many high-income countries (see chart). Similarly, with few exceptions, the relative wages of unskilled workers have been in long-term decline in these countries or, where that has been prevented by regulations and welfare benefits, unemployment has tended to be high. Either way, the job opportunities of unskilled workers have deteriorated in rich countries.

Fourth, the increase in the intensity of competition in sectors open to international competition has been a big part of the explanation for the greater ease of achieving low inflation almost everywhere. Harvard's Kenneth Rogoff has argued that: "As economies become more competitive, prices become more flexible, reducing the impact of unanticipated inflation on output...As a result, the central bank's anti-inflation credibility is enhanced, and trend inflation falls."**

Fifth, high desired savings have generated exceptionally low real interest rates. The savings are partly the result of a shift in income to three groups of high savers: the famously thrifty populations of the Asian export-driven economies; claimants on corporate profits; and the countries dependent on oil exporters. Asia and the oil exporters are forecast by the International Monetary Fund to run an aggregate current account surplus of close to $700bn this year. Without the growth surge in Asia, corporate profits and oil prices would have been lower, perhaps considerably lower, and global current account surpluses and deficits would also have been correspondingly smaller.

Sixth, new adjustment challenges have arisen. But the nature of those challenges depends on whether economies are complementary to – or competitive with – the resurgent China. Economies with a comparative advantage in skill-intensive exports, such as Germany, benefit from the rise of the new Asian powers, as do exporters of commodities, particularly energy. Economies with a historic comparative advantage in labour-intensive low- and medium-technology products, such as Mexico or much of southern Europe and south-east Asia, suffer. But even those countries that stand to gain from the upheaval now under way can do so only if flexible enough to sustain high levels of employment. Where they are unable to do so, they may see even more of their cities burning, as marginalised outsiders express their discontent.

Let me be precise. I am not saying that the changes we are now seeing are mainly the consequence of China's rise. Much evidence suggests, for example, that the rise in the demand for skilled labour is driven far more by technology than by trade. Again, China's demand has not been the sole source of the surge in demand for oil.

Such qualifications must be made. Yet something massive is happening. Some 500 years ago, Europe began its long rise to pre-eminence. For the past two centuries, Europe and the US, its most successful colonial offshoot, have dominated the world. Until a generation ago, Japan alone challenged that state of affairs. Then Hong Kong, Singapore, Taiwan and South Korea flourished. Now, however, the colossi are on the move.

The advent of sustained and rapid economic growth in these giants will transform the world. Indeed, it is doing so already. The impact is still modest. It will not remain so. The challenge for the rest of the world is not just to adapt, but to exploit the opportunities this great global transformation will bring.

*Globalisation, Poverty and Inequality (Polity, 2005); **Globalisation and Global Inflation, August 2003, www.imf.org.