Despite China's extraordinary recovery, the debate over its economic prospects has intensified as new questions have emerged about China's exit strategy and its relationship with the United States.
If China allows its yuan to appreciate, it will reduce pressure on the Obama administration to officially label China a currency manipulator and would establish a more constructive atmosphere for future cooperation between the two nations.
While China may experience a painful financial contraction as it increases private consumption, even a dramatic slowdown of Chinese growth will not prevent China’s share of global GDP from rising.
Since China’s domestic consumption is unlikely to grow fast enough to adequately balance the rising savings rate in the United States, global trade tensions are going to continue to escalate until a long-term solution is reached.
While China is likely to enjoy solid growth again this year, its policy solutions to achieve short-term economic objectives have made long-term rebalancing even more difficult.
While China has adopted an increasingly tough stance in recent disputes with the United States, its rhetoric has not been matched by aggressive action, and fears about a new cold war are unfounded.
As the U.S trade deficit becomes increasingly politicized in the face of high unemployment and a global contraction in demand, there is an increasing likelihood of trade tensions with net surplus countries, especially China.
Google’s defiance of the Chinese government will likely remain a crucial moment in China’s relations with the West in general, and should be viewed as a lesson on China’s political calculations behind its policy toward Western companies.
The idea that massive levels of foreign currency reserves are a guarantor of economic stability is based on a profound misunderstanding both of history and of the nature of reserves, which are almost totally useless in protecting large economies from domestic bubbles.
The contraction in global demand set off by the financial crisis has led to escalating trade tensions between China and the United States, and a breakdown in trade will slow the global recovery and create hostility and mistrust between major economies whose cooperation is necessary to resolving important global problems.