The U.S.-China links

China's economy has emerged with amazing speed. Fifteen years ago it was a marginal story; today, news out of China regularly shakes world financial markets. China is America's most formidable competitor and greatest worry. It is also our biggest economic opportunity.

The country's rapid economic ascent has brought huge changes for the United States, some pleasant, others less so. The greatest economic boom stems from the flood of inexpensive Chinese products, which allow American households to consume a lot more of the things they want. An artificially cheap currency, its dollar exchange value managed by the Chinese government, has also kept prices of Chinese products low for Americans.

Of course, this has been tough on U.S. manufacturers. Most of those that competed head-on against Chinese producers have vanished, taking many jobs with them. More broadly, U.S. workers with lesser skills and education have been hammered as they lost out to lower-paid Chinese workers. It is too simplistic to say that the wide and growing gap between the haves and have-nots in our country is due to the rise of China, but China has certainly been a significant contributing factor.

China's economy has grown so large that any sign of trouble there can send world financial markets into a tizzy. This past week, news that Chinese authorities were cracking down on runaway bank lending contributed to wild swings in the U.S. stock market. Investors fear that slower growth in China will crimp global growth and hurt the profits of U.S. companies.

Investors are rightly focused on China, but worries about its imminent demise are misplaced. The Chinese have problems with overlending and overbuilding, and given their hyperbolic growth, they have surely made some bad investments that will eventually be exposed. But China's recent policy efforts show authorities are working to address these problems, and they can use their trillions in international reserves if they misstep. China's massive cash hoard can quickly purchase lots of airports, superhighways, and bullet trains if their economic ship begins to list.

This is not to say the path is straight up for the Chinese economy. Its pace will slow over the coming decade, as the country's one-child policy slows the growth of its workforce. The dramatic rise in productivity over the last three decades will also be hard to replicate, since much of it followed the mass migration from small-scale farms in the hinterlands to world-class factories on the coasts. As this process plays out, future gains in productivity will be incremental, from technology and ordinary business improvements, as in the United States.

Slower economic growth will intensify political pressures. The Chinese people have accepted limits on their freedom in exchange for rising living standards. If that does not continue, more will demand a say in the country's future. This is especially true of the newly educated Chinese middle class. It remains unclear how much control the authorities will cede, at least without a fight that won't be good for business when it happens.

Fears that the Chinese economy will overrun ours are thus likely overdone. Meanwhile, China is set to become a huge U.S. market. The services China's people will want as they become wealthier are exactly those in which American firms lead the world: accounting, finance and law, media and entertainment, logistics and transportation, computer programming and data management, health care and education. These growing industries will employ many educated, skilled, and highly paid Americans.

But to ensure this, we must press the Chinese to make significant policy changes. They need to free their currency, allowing market forces to determine its value. They must offer more than lip service to intellectual property rights, so U.S. firms feel comfortable that their trade secrets are safe in China. The Chinese government must also provide a sturdier financial safety net for its people when they get sick, lose jobs, and grow old; without such a backstop, Chinese consumers will remain reluctant spenders, which isn't good for anyone.

The most productive way to accomplish this is to engage, closely and intently, with China. The more our economies rely on each other, the more likely our interests will coincide. That China owns $1 trillion in U.S. Treasury bonds isn't a problem for us, as some argue; rather, it means China cannot dump its holdings without significantly undermining their value. If our economic interests are aligned, we are both more likely to do right by each other.

The U.S.-China relationship is complex and rife with risk, but it holds enormous promise. Making it work will ensure that the next century won't be an American or Chinese century, but truly a global one, and we will all be the better for it.