Center for Pacific Basin Studies

China prohibits its private sector from freely trading foreign assets and tightly manages currency exchange rates. In the wake of the recent global financial crisis, interest rates on China's foreign assets fell sharply, while yields on Chinese domestic assets remained relatively high, posing a challenge for China's monetary policy. Opening the capital account would improve China's capacity to weather external shocks, such as sudden declines in foreign interest rates. However, allowing the exchange rate to float without removing capital controls is less effective.

Many analysts have predicted that a Chinese economic slowdown is inevitable because the country is approaching the per capita income at which growth in other countries began to decelerate. However, China may escape such a slowdown because of its uneven development. An analysis based on episodes of rapid expansion in four other Asian countries suggests that growth in China's more developed provinces may slow to 5.5% by the close of the decade. But growth in the country's less-developed provinces is expected to run at a robust 7.5% pace.

In the wake of the global financial crisis of 2007-08, Asia has emerged as a pillar of financial stability and economic growth. A recent San Francisco Federal Reserve Bank conference focused on Asia's changing role in the global economy. Asia's relative strength is allowing it to play an expanded part in multilateral responses to the European sovereign debt crisis. And the reforms put in place following the 1997 Asian financial crisis offer models for countries currently trying to stabilize their economies.

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the "Made in China" label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending. This suggests that Chinese inflation will have little direct effect on U.S. consumer prices.

Economists drew a number of lessons from the Asian financial crisis of 1997-98 for preventing such episodes or mitigating their effects. Some of those are similar to lessons drawn from the global financial crisis of 2007-09. But differences in economic development and sophistication of the financial systems of East Asian countries compared with those of the United States and Western Europe made it difficult to apply the lessons of the earlier crisis.