China's role on the Global Stage.
In just 40+ yrs of full speed ahead growth, China overtook Japan as the World's # 2 economy in Y 2010.
The West has reacted to this blinding success has been mixed, leaving just 1 Big Q: What role will China play in the World as it continues to grow?
I traveled and lived in China between 2002 and 2007, and while there I learned that throughout its 4,000+ yr history it has looked inward, and not to the outside as a colonizing conqueror. This POV is what I observed when I walked on the Great Wall.
While there, I learned 1st hand that China's vision is not to become a hegemonic power. And for the West to demonize its successful March out of feudalism will not foster long term stability in Asia or be good for a China-US-China relationship.
It is a fact that China has done more than any other economy to help pull the World out of its recent recession, and by doing so established itself as an important economic engine of Global growth in the long term .
China's 12th Five-Year Plan Y's 2011-2015, mandates a move from export-led, investment-driven growth to balanced economic development that promotes a sustainable growth rate going forward, while at the same time playing an active role on the Global stage in the Key areas of climate change, poverty alleviation, infrastructure development, and reforms in the International Monetary System.
Y 2011 presents many challenges; the Global recovery is fragile, Nations threaten protectionism, and fiscal pressures demand strong and coordinated action. It is clear that China is playing an important role in helping to solve these problems.
Just a few months ago China identified rising inflation within at the rate of 5.1%, as its Key near term risk and took steps to cool it immediately. The massive Global liquidity led to rising input costs, but the rise in China's credit over the last 2 yrs is also at fault, when I was there prior to 2007 Credit Cards were only for the elite and virtually not used, they were decorations and transactions made in cash.
Inflation is always a factor when there is flowing liquidity, and strong demand. In order to avoid a Japanese style Boom/Bust scenario, China must stabilize its housing prices, and change the supply of residential units to meet people's demand for affordable housing.
Just as importantly, China must be willing to make short-term sacrifices, such as asset price adjustments or a temporary drop in employment in some sectors, to guarantee the long-term stability of its National economy. China can leverage off its extremely strong fiscal position of 19% debt to GDP ratio, to ensure that domestic demand does not suffer dramatically, these are tough choices.
On one hand, not to cool the economy would result in serious consequences for China's long-term growth.
On the other hand, a hard landing would likely shake the confidence in emerging markets, and set back the Global economy significantly.
The US' attempts to blame a undervalued Yuan for its economic problems are merit less scapegoating IMO . But, it should be recognized (and I believe that it is) that a stronger Yuan is in China's interest as well as the interest of the US, as it will help to control inflation inside the country.
It is likely that the developed World will not to move toward policy normalization anytime soon, capital flows will probably be lopsided at a time when China is working to rein in inflation, and deflate its asset bubbles.
China must strengthen its management of cross-border capital inflows, even though some of them are not speculations.
China's leaders have said that they will not do anything to destabilize the World's sovereign bond markets. And the World expects the US and the EU will act responsibly toward their creditors.
As I have said in prior articles the US is debasing its currency with QE-2, and President Barack Obama's tax deal has failed to address the deficit, and slow the fear of its creditors.
So this year might see China sending a clear message to the US, that being; Do not expect any more showings of great generosity from us.
Those of us who have a handle on the Globalization of the World's economies since the crisis of 2007 note that the absence of alternatives to the USD as a reserve currency fosters a sense of security within the US Treasury Department and the US Federal Reserve.
A slowing and or reduction in Chinese buying as it reduces its current account surplus, and diversifies away from USD assets will surely be felt in the US Treasuries' market.