This strategy is not without risks. Allowing the renminbi to appreciate as a way of encouraging imports may also discourage exports, the traditional motor of Chinese growth. And lowering administrative barriers to imports might redirect more spending toward foreign goods than the authorities intend. But these are risks worth taking if China is serious about assuming a global leadership role.
The question is what China will get in return. And the answer brings us back, full circle, to where we started, namely to US fiscal policy. China is worried that its more than US$1 trillion investment in US Treasury securities will not hold its value. It wants reassurance that the US will stand behind its debts. It therefore wants to see a credible program for balancing the US budget once the recession ends.
And, tough talk notwithstanding, the administration of US President Barack Obama has yet to offer a credible roadmap for fiscal consolidation. Doing so would reassure US taxpayers worried about current deficits. Just as importantly, it would reassure Chinese policymakers.
We live in a multipolar world where neither the US nor China is large enough to exercise global economic leadership on its own. For China, leadership means assuming additional risks. But for this to be tolerable, the US needs to relieve China of existing risks. Only by working together can the two countries lead the world economy out of its current doldrums.
Barry Eichengreen is a professor of economics at the University of California, Berkeley.
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