How China and the US can boost the global economy

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?

In economies that have run large current account deficits, national saving will need to increase. In many of these economies, including that of the United States, fiscal consolidation must take priority. And in those that have experienced asset price busts, financial-sector repair will be essential for a lasting recovery.

On the other hand, in economies that have run large current account surpluses, domestic demand needs to be stronger. In euro-area economies and in Japan, competition in product and labor markets should be increased. And in emerging Asia, rebalancing means increasing domestic demand – investment in many countries, and in China, an emphasis on private consumption.

China's leadership has already articulated a clear vision for how to boost private consumption. Consumer spending is growing faster than the economy as a whole. Moreover, as noted recently by President Hu Jintao, China will be taking further steps to boost household spending – and reduce reliance on exports – in the period ahead.

Much is already being done. For example, the bold new initiative to provide quality healthcare for most of the Chinese people. Reform of the rural pension system is also moving forward. But more can be done to secure a lasting, structural shift toward consumption, by expanding the scope of social policies, moving ahead on financial-sector reform and undertaking corporate governance reforms.

A stronger currency is part of the package of necessary reforms. Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment.

At the end of the day, higher Chinese domestic demand, along with higher US saving, will help rebalance world demand and assure a healthier global economy for us all.

Dominique Strauss-Kahn is the managing director of the International Monetary Fund. This commentary is adapted from a speech he delivered in Beijing Nov. 16 to the International Finance Forum.

© 2009 Global Viewpoint/Tribune Media Services. Hosted online by The Christian Science Monitor.

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