CHINA US Focus - Perspectives shaping the world's most important bilateral relationship

China’s adjustment of its investment-income deficit for 2011 exposes flaws in economic growth, but hasn’t raised as much concern as it should. Two statistics account for China’s negative net investment-income, high return on foreign investment and China’s foreign assets are mostly US dollars. Without fundamental change, it is hard to imagine a sable Chinese economy in the long-term future.

China’s successful transformation from a middle-income country to a modern, high-income country will depend largely on the reforms that the government undertakes over the next decade. But, because the most pressing reform – interest-rate liberalization – carries both risks and rewards, officials should be prudent in their approach.

From a medium and long-term point of view, a race between reform and crisis will be inevitable, says Zhang Monan. China must perfect its central and local financial systems, and create a framework for the control of financial debt risks at the earliest date possible.

The People’s Bank of China has been pursuing capital-account liberalization at an increasing rate since 2009. But Chinese policymakers should recognize the significant risks inherent in relaxing capital controls – risks that imply the need for a more cautious approach.

According to Chinese news reports, urbanization could add 400 million more people to the current Chinese urban population in the next decade. Ding Yifan writes that this will objectively promote the further liberalization of China’s domestic capital markets, driven by comprehensive reform.

Reflecting on lessons from Sun Tzu’s “The Art of War,” Tom Watkins urges the US leadership to find a balance between military spending and domestic priorities lest history repeat itself.