Asian economies have so far profited from China’s growth. But China is quickly replacing the intermediate goods it used to import from its Southern neighbors with domestic production. Will these countries suffer from decreasing exports to China? (Gol Tai-Ka, Taiwan)

The impact will depend on whether the neighbors specialize in components that go into assembly operations in China or sell capital goods and technology to Chinese enterprises. China is moving faster into domestic sourcing of components for, say, electronics assembly than into the production of sophisticated capital goods and technology. So countries that specialize in components will be quicker to feel the pinch.

China today resembles the United States in the late XIX century: an immense country with a huge potential market that is quickly materializing. Should we worry about China’s coming dominance of the world economy? (John Byrd, Santa Fe, NM, USA)

Mr. Byrd doesn’t specify whether we should worry about the economic or political implications. Let me assume that he is asking about the economy. (Economists can pontificate on anything, but it is good to stick to one’s knitting.)

From an economic perspective, there is every reason to believe that fast Chinese growth will be good for the world economy, especially as the consumer market develops and the country becomes a more important source of demand for other countries. This is my interpretation of the effects of the emergence of the United States as the world’s largest economy in the late 19th and early 20th centuries: its growth helped to sustain demand in what was also a period of rapid supply expansion.

To be sure, the consequences will not be happy for producers who compete head to head with such a large, rapidly growing economy. In the 19th century that meant European farmers who faced the “grain invasion” from the American Midwest. Not long from now it will mean the motor vehicle producers of South Korea and Detroit who will have to compete with cheap, well-engineered Chinese cars.

How much does China depend on domestic savings to finance its massive investments? As the Chinese become more affluent, will they reduce their savings rate? (Deepak Subramanyan, Mumbai, India)

At the moment, Chinese savings more than finance Chinese investment; that’s why China is running a current account surplus. One can safely forecast that savings rates will fall from their 40+ per cent of GDP as the Chinese become more affluent; it’s just hard to say when. (Recall the first rule of forecasting: give them a prediction or give them a date but never both.)

The adjustment in household savings rates is likely to be slow, since the development of financial markets (which will facilitate borrowing for the purchase of residences, higher education etc.) will take time, the social safety net will develop only gradually, and the higher old age dependency ratio that will emerge after 2015 will be matched by a lower youth dependency ratio.

The key, therefore, is to cut the 20+ per cent of GDP that Chinese enterprises save. Encouraging firms to pay out their earnings as dividends so that the recipients can use them for consumption as well as investment should be a priority for policy. This will also have the ancillary benefit of encouraging a more efficient allocation of investible resources.

China is under strong pressure from the IMF to reform its economy. Is this due to United States’ prominent role in the IMF? (Gilles Saliter, Nanterre, France)

It is clear that the Bush Treasury would like to see the Chinese authorities stimulate domestic demand while allowing the exchange rate to rise in order to help narrow the US current account deficit. The IMF would like to see the same quite independent of US pressures and preferences; the Fund sees this change in China’s policy mix as good for China (it would give the economy a better balance between home and foreign demand and render it less vulnerable to a US slowdown) and good for the world (it would reduce the likelihood of a disorderly correction of global imbalances).

When will a corporate debt market emerge in China? (Nikos Achiolas, Greece)

Once China has enhanced the transparency of its financial markets and significantly strengthened corporate governance. In other words, not anytime soon.

I have the impression that the US is putting pressure on China to revalue the renminbi in order to protect US manufacturing jobs. Is this a sound long-term goal? (Howard Singleton, USA)

Manufacturing jobs are always an issue in an election year. But the larger issue is that the US can’t continue living beyond its means indefinitely. Reining in the US current account deficit by slowing the growth of domestic demand would precipitate a recession without additional demand stimulus in the rest of the world.

The region that has room to stimulate demand is Asia. As Asia consumes more and the US consumes less (as the growth of demand slows here and accelerates there), a change in relative prices will be required. Asian goods will become more expensive, since two-thirds of what is consumed in Asia is produced there as well. US goods will have to become cheaper to enable us to export more of them (so that slowing demand growth here is not accompanied by a slowing of production growth).

A change in the exchange rate is required to bring about these adjustments and to correct global imbalances in an orderly way. The Bush Treasury understands this, although it has not always communicated the logic clearly.

When do you think China will reach the point of incompatibility between economic growth and lack of democracy? (Mike Attenborough, London, UK)

Remember the first rule of forecasting (see above). So long as the system continues to deliver the goods, there will be a willingness to accept limits on political freedom as the price for higher living standards. But if growth slows, dissatisfaction with the terms of the bargain would develop quickly. Students of American politics will remember what James Carville had to say about this.

China has adopted a gradualist approach to exchange rate management. As foreign governments are asking China to become more accountable to market forces, will gradualism be sustainable?

As I have argued above, the case for faster renminbi adjustment is compelling. If the Chinese authorities resist, they will again risk inciting protectionist legislation in the United States. They will once again find themselves battling to contain inflationary pressure and limit the risk of overheating. Chinese households will feel frustrated that consumption standards are not rising faster (recall my earlier argument that boosting domestic demand will require the authorities to permit the exchange rate to appreciate to slow the growth of exports and thereby avoid creating excess demand).

So foreign political pressure, domestic political pressure, and market forces will combine to push the authorities in the direction of less gradualism and more action.

China’s government repeatedly refused to deregulate the country’s financial markets and fully liberalize direct investment from abroad. Shouldn’t markets, not party officials, decide which firms are worth investing in?

Yes ultimately, but no for now. The lesson of the Asian crisis is that liberalizing financial markets, international financial markets in particular, prior to making significant progress in strengthening financial markets, improving corporate governance, and adopting a more flexible exchange rate is a recipe for disaster. In my view the Chinese authorities should move faster on these last three fronts, where they have a lot to do, and slower at capital account liberalization.