China must allow currency to rise. The US must boost savings.
China's role in the international policy debate has been rising in tandem with its growing economy. As a key member of the G-20, China is helping to elaborate the global policy priorities for the future and devise solutions to global problems.
What are the principal challenges for the world as it begins to emerge from the global crisis? And what can China do?
The global economy appears to have turned the corner at last. The recovery is uneven and not yet self-sustaining, but many emerging economies – especially in Asia – are turning around strongly. Indeed, in China, we project growth of 8.5 percent for 2009 and 9 percent in 2010.
While the global outlook has thankfully improved, we still face considerable policy challenges. The biggest risk is a premature withdrawal of policy stimulus. While it is prudent to plan for so-called exit strategies, policymakers should keep supportive measures in place until a recovery is firmly established, and particularly until conditions are in place for unemployment to decline.
In China, the government's commitment to maintain fiscal stimulus into 2010 will be important for supporting growth. As the government also recognizes, however, the time has come to begin slowing the very rapid pace of loan growth, which raises risks of overinvestment, overcapacity, and ultimately bad loans.
With the recovery emerging, a key medium-term policy challenge for the global economy is how to achieve a more stable distribution of demand across economies. This is the challenge of what we have come to call global economic rebalancing.
In the run-up to the crisis, global imbalances widened significantly. Because they raised concerns of possible disorderly adjustment, these imbalances have been a source of concern for policymakers. And although global imbalances have declined during the crisis, they remain large and could widen again as the global economy normalizes.
What can the economies at the heart of these imbalances – China and the United States – do?