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Political concerns will dominate Beijing's economic decision-making as Chinese leaders seek a gradual adjustment that will balance competing constituencies.
The only way to sustainably increase Chinese domestic consumption is to bolster the share of national income belonging to households by transitioning away from the Asian development model that led to Japan’s economic decline.
There is still a great deal of uncertainty regarding the current debt crisis, since there is no simple way to determine whether a country will default and the necessary major global adjustments have not yet taken place.
Rising inflation rates will likely trigger a decline in real interest rates, further decreasing the cost of capital and worsening the imbalance between China’s national GDP and average household income.
Shanghai’s markets will go up and down, but they are not driven by investor evaluation of long-term growth prospects. China does not yet posses the tools to make such evaluation useful, so be careful about reading too much into the stock market numbers.
The Euro crisis, rather than reducing the urgency for China to revalue its currency and adjust its trade policy, may in fact require that China react much more aggressively than originally planned.
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