China needs to slow down its economy enough to cool inflation at home without putting a drag on growth in the rest of the world.
This will require careful calibration. It's no secret that advanced economies are growing slowly. The International Monetary Fund thinks 2011 output will reach just 2.2 percent in rich countries while China romps ahead at 9.6 percent.
Figures this week are expected to show China's import growth outpaced that of exports in November, although the total volume of goods flowing out still easily dwarfs those coming in.
The trade balance probably widened yet again last month, according to economists polled by Reuters, providing more ammunition for critics who say China holds down its yuan currency to gain a trade advantage.
(China trade, inflation graphic: http://r.reuters.com/syw48q)
For the global economy, the question is what happens to China's domestic demand once policymakers begin twisting harder on the credit screws to try to tame inflation.
Chinese inflation data won't come for another week, but economists think the consumer price index edged closer to a 5.0 percent year-over-year growth rate in November, up from an already uncomfortable high 4.4 percent in October.
The Communist Party's top leaders announced on Friday they would switch to a prudent monetary policy while maintaining proactive fiscal policy, a signal that they are well aware of the need to ensure a gentle slowdown.
Donald Straszheim, head of China research at ISI Group in Los Angeles, said Beijing was clearly on a path to raise interest rates, but how fast and how far remains to be seen.
The term prudent means whatever the appropriate officials want it to mean, Straszheim said, adding that China may aim to contract the money supply and restrict new lending in order to cool the economy.
China has already taken steps to curb lending, raising banks' required reserve ratio twice in the past month.
Xianfang Ren, an economist with IHS Global Insight in Beijing, said the government's tightening message was clear and strong as inflation spreads beyond financial markets and food and into a broader range of goods.
Nonetheless, the government exit from the stimulus cycle is expected to be quite calculated and smooth as the policymakers try to avoid a hard landing, he said.
DIVERGING, NOT DECOUPLING
The rest of the world would like to see China avoid a hard landing, too.
For the European Union, China is the biggest trading partner and the region can ill afford another threat to growth while sovereign debt tensions refuse to subside.
According to the European Commission, EU goods imports from China were nearly 215 billion euros last year, and exports to China exceed 80 billion euros.
The term 'decoupled' may be trite, but resilient activity in parts of the globe provides a healthy backdrop against which Europe can grapple with its structural woes, said Simon Hayes, an economist with Barclays Capital in London.
Trade numbers from Germany on Wednesday are expected to show imports grew faster than exports, narrowing the trade surplus slightly. Germany's figures cover October (unlike China's, which are for November) so they precede the latest eruption of debt worries, which drove down the euro.
U.S. trade data, due on Friday, will probably look similar to the month before when the gap was $44 billion. Like Germany's, these figures are for October and may be too backward-looking to get much attention from investors focused on the here-and-now fears about European debt.