Carnegie Endowment for International Peace
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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.
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.
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.
There is still a great deal of uncertainty regarding the current debt crisis, since there is no simple way to determine whether a country will default and the necessary major global adjustments have not yet taken place.
An international agreement to limit current account surpluses would be a productive step toward global economic rebalancing, but in order to decrease its trade deficit, the United States must also enact domestic reform.
Although the U.S. Federal Reserve's recent quantitative easing is a necessary step, it makes China even less likely to embrace Secretary Geithner's proposal to limit current account surpluses.
The only way to sustainably increase Chinese domestic consumption is to bolster the share of national income belonging to households by transitioning away from the Asian development model that led to Japan’s economic decline.
Although an appreciation in China's currency value could benefit the United States in theory, Chinese leaders would likely counterbalance such a rise with policies that could further damage both the Chinese and U.S. economies.
Political concerns will dominate Beijing's economic decision-making as Chinese leaders seek a gradual adjustment that will balance competing constituencies.
China will likely expand access to cheap credit even as it revalues its currency in the coming months, counterbalancing the effects of revaluation and further exacerbating China's economic imbalances.