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Taking China’s Risks Seriously

Feb 17 , 2011

A static watch gives the right time twice a day. But it is of no use for the rest of the time. This fact is worth keeping in mind when looking at China's economy this year. For much of the last decade some people have predicted imminent doom and gloom for China. But their predictions are like reading the time by a static watch.

China has continued to grow from strength to strength. Its economy has soared. Its influence has grown. And all this has benefited Asia as well as the rest of the world.

The question then is: Is 2011 the year when problems in China will emerge? Is this the time when the static watch is right?

China's risks are different from those of the West, where debt problems persist. Across Asia, inflationary pressures are rising and monetary policy needs to be tightened.

The challenge for China is that in recent years it has tied itself too closely to the United States' monetary policy. In doing so, it has kept interest rates lower than necessary and its currency weak. Resolving these issues is vital and China has already started doing that.

The US and China both need to set monetary and fiscal policies to suit their domestic needs. The US is doing this. Facing deflation, the Federal Reserve (Fed) introduced a second round of quantitative easing, or QE2, last year despite the criticism it evoked from other countries. The US administration has followed it up with a huge fiscal boost. The expected result: The US economy will grow strongly this year, particularly in the first half.

Read full article HERE

Gerard Lyons is chief economist and group head of global research at Standard Chartered Bank.

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