On the other hand, the 14-trillion dollar US economy, emerging out of its longest recession in eight decades, embarks on a long road of recovery having to bring down its 10 per cent unemployment rate and plan for a long-run exit from its huge deficits and rising public debt. Even otherwise, the Obama Administration has to negotiate a perilous path with the geo-political challenges, especially an intensification of the war against terrorism.

At the start of the second decade, China has overtaken Germany as the largest exporter and the United States as the biggest auto market in terms of vehicle sales, and is poised soon to surpass Japan as the second leading economic power in the world. It mobilised its enormous fiscal resources in the aftermath of the global financial crisis to overcome the negative impact of worst recession in the advanced countries, which led to a severe contraction in global trade flows hitting China hard.

With a “pro-active fiscal policy”, providing a massive stimulus of 587 billion dollars, and a “moderately loose” monetary policy, China successfully reversed the downtrend to maintain robust growth, rising with every quarter to achieve the 8 per cent target it set for itself in 2009. “We have stabilised the economy and employment and maintained social stability,” Premier Wen Jiabao said at the turn of the year. Government spending on infrastructure (road and rail, notably the high-speed Beijing-Shanghai line) affordable housing projects, rural facilities, improving people's livelihood, environmental protection, etc was supplemented by aggressive state-directed bank-lending to boost investment and domestic consumption.

The turnaround in exports in December, the first increase in 14 months, helped China to record 1.2 trillion dollars in 2009, above the 1.17 trillion dollars forecast for Germany, the world's largest exporter hitherto. With imports at 1.01 trillion, China's trade surplus was 196 billion dollars, though 34 per cent less than in 2008. Exports in December climbed by 17.7 per cent with exports to USA and EU increasing by 15.9 and 10.2 per cent respectively though these reflected a low-base effect. Though China is perceptibly moving toward greater domestic consumption for the future, it has maintained a conducive climate for exports with its tax concessions, subsidies and above all keeping the yuan/dollar rate fixed, even when the dollar declines. By not allowing its currency to fluctuate unlike the dollar, the euro or the yen, China has effectively ensured a cost advantage over its rivals.

China strongly resists calls for revaluation of its currency with Premier Wen Jiabao saying, 'we will not yield to any pressure, in any form, to force us to let our currency appreciate'. It accuses USA of not managing its finances prudently to keep its dollar stable and resorting increasingly to protectionism. Under pressure from domestic industry and labour unions and a Congress ever wary of China's “manipulative” currency policy, US Administration has been levying new tariffs on tires, steel pipes, and a range of other items. EU has lined up its own anti-dumping duties against China's imports. Added to these trade tensions, are other global issues like climate change where China has become the leading player with a toughness reflective of its rising economic and military power. An uneasy compromise was struck in Copenhagen involving the world's two largest polluters, China and USA.

The Obama Administration has tried to be accommodative to Chinese concerns in certain respects. The President deferred his meeting with the Dalai Lama last year ahead of his visit to China in November and US top officials have been making only muted references to what they may consider an abysmal record of China's observance of human rights. US Secretary of State Hillary Clinton soft-pedalled this issue in her first visit to China in mid-2009, and as she began her first new year visit to Japan and other countries in Asia-Pacific, she noted that bilateral relations with Beijing could be entering a rough period in 2010 with the US pledge to sell weapons to Taiwan, though the two economic giants had established a “mature relationship” last year. USA adheres to “One China” policy but is bound by commitment to protect Taiwan.

China's leading role in global decision-making has become more pronounced in the deliberations at G-20 Summits, the next one scheduled to be held in Canada in June 2010. The world economy, which was mainly driven by emerging markets like China and India in 2009, has begun to show “strong signals” of recovery and industrial production is reviving in major (G-7) advanced economies and moving toward long-term trends, according to Paris-based OECD which monitors 30 richer nations and the major non-OECD economies like China, India, Russia and Brazil. Increase in leading indicators was reported for these economies except India in November. Also, unlike other emerging economies, India's CPI has been steadily rising rising with every quarter since April 2008. The increase was 20 percentage points between the 2nd quarter of 2008 to third quarter of 2009.

Most central banks of major economies are for the present maintaining the record low level interest interests to let recovery take firm hold but consumer price inflation may not remain subdued through the new year. This will have to be factored in as the central banks review monetary policies in the first half of the new year. IMF has cautioned against premature exits though it equally insists on credible frameworks for medium-term fiscal consolidation as well as central banks calibrating their accommodative policy stance.

China's GDP galloped to 8.9 per cent growth in the third quarter after 6.1 and 7.9 per cent in the first two quarters. With investment and industrial growth picking up steam and domestic consumption rising on the back of higher income for residents, China looks set to move into “fast lane” in 2010, improving upon its 8 per cent or more last year. President Hu Jintao has called for deepening of fiscal taxation system reforms, improved efficiency in fiscal management, and keeping up stable but comparatively faster economic development. Chinese economists expect growth to range 9-10 per cent in 2010. China also looks to significant recovery in the west to maintain its share in exports though in G-20, it has committed itself to a strong, sustainable and balanced growth with greater emphasis on domestic consumption.

But China is also running risks with its booming property prices and a build-up of bad debts in the wake of excessive lending (to stimulate domestic demand and support exports) in 2009 which has also contributed to overcapacity in industries. China's imports of commodities including oil and minerals had also given a boost to international commodity prices despite general worldwide economic slowdown. Oil prices have resurged during 2009 and the year closed with crude prices at close to 80 dollars a barrel - a level with which OPEC feels highly comfortable, with the promising signs of demand growth in China and India.

Though its trade surplus shrunk in 2009, China's reserves now exceed two trillion dollars keeping alive concerns about global imbalances unless surplus countries firmly implement policies to shift focus from exports to domestic demand. China has become “a major financial and trade power” and 2010 will be the year of China, says Mr Paul Krugman, noted economist in his New York Times column. But, he avers, China follows a mercantilist policy, keeping its trade surplus “artificially high” by pegging its currency at 6.8 to the dollar when the US currency had been sliding in value. For its part, China is making use of its surplus reserves to acquire resource firms abroad and is also promoting trade with countries like Brazil denominated in yuan, away from the dollar.

China's CPI is also creeping up and the Central Bank says it would manage inflation expectations and keep a close watch on the property market through its credit and monetary policies this year. While ample liquidity would be maintained in the financial system, banks would be directed to lend more evenly to ensure credit was directed to priority sectors.

Record lending by banks and capital inflows have fuelled the boom in property market with prices rising fastest in November in 70 major cities. Policy tightening has been indicated. (IPA Service)