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Following its spectacular recovery from the financial crisis, China is now confronting a serious housing bubble, labor unrest, and potential debt problems. Though China’s economic prospects remain strong, a slowdown would have important international implications.
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.
Leaders in both the United States and China need to move beyond heated rhetoric and political electoral considerations and look for areas of cooperation in building a constructive bilateral agenda.
The collapse of the euro presents an opportunity for China to introduce greater exchange rate flexibility and let the renminbi depreciate, in order to prevent dangerous speculative capital inflows.
The Korean peninsula may be at its dangerous moment since the 1953 armistice, but the steadiness of the South Korean government and actions by the United States and China should prevent a serious conflict from taking place.
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.
China’s steps to limit the damage from the Greek crisis will necessarily shift the brunt of the economic adjustment to other countries, unless the major trading powers can reach a burden-sharing agreement.
While India has recently adopted a more conciliatory attitude in trying to resolve its long-standing border disputes with China, it remains to be seen whether this diplomatic cooperation will continue.
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.
In recent months, the United States and China have gone through a rough patch in bilateral relations. Yet such setbacks represent a very short period in a much longer timeframe of U.S.-China cooperation.