The Chinese central bank's decision to raise interest rates is a positive step toward economic rebalancing, but it needs to be followed up by larger rate hikes if China is to increase domestic consumption.
In order to sustain economic growth during its transition toward a more balanced economy and help keep U.S. demand for Chinese exports high, Beijing should invest in the U.S. transportation infrastructure.
China will likely expand access to cheap credit even as it revalues its currency in the coming months, counterbalancing the effects of revaluation and further exacerbating China's economic imbalances.
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.