China has capitalized on its huge population and geographic size to become the world’s most efficient assembler and exporter of manufactured goods, but China’s transformation is now reaching a critical turning point.

In a paper, Yukon Huang explains how China relied on lower transportation costs and a concentration of economic activities to foster rapid—albeit unbalanced—growth. If China builds on its recent success and adopts a more flexible exchange rate system, the four major policy questions that are now dominating the debate over China’s economic future can be answered as follows:

  • Will China’s economic growth slow down in the coming years? Lower investment rates and reduced trade surpluses point to slower GDP growth, but if China can increase productivity and consumption, the decline will be modest. Such an outcome would be more sustainable and beneficial to workers.

  • Is an appreciation of the yuan in the interest of the United States or China? A major one-time revaluation of the yuan would not be in the interests of the United States or China, but greater flexibility—in both directions—is in the interests of China and indirectly of America and the rest of the world.

  • Will China’s growth be driven by exports, investment, or consumption? A healthier balance between all three will be restored. Wages and consumption rise as a share of income, with investment declining to more sustainable levels. Trade surpluses will moderate but remain positive.

  • Can China continue to grow quickly while also reducing income inequalities? As growth centers shift gradually inland, poorer rural inhabitants move to the cities, and wages rise, income disparities will decline.

“Forces are now coming into play that will reshape China’s economic landscape during the coming years in ways that should help harmonize the impact on the global economy of China’s growth, which currently is rattling global trade and commodity markets,” writes Huang.