After 30 years of breakneck growth, China overtook Japan to become the world’s second largest economy in 2010. The reaction in the west to this stunning success boils down to one question: what role will China play in the world? China will have a bigger part to play in global areas such as climate change, poverty alleviation, infrastructure, and reform of the international monetary system. But my country has long remained inward-looking, a tendency most clearly expressed in our Great Wall. Despite occasional bellicose reactions to what it regards as provocations, China still harbours no ambition to be a hegemonic power.

Even so, as former US national security advisor Zbigniew Brzezinski noted recently, the risk of a “drift into escalating reciprocal demonisation” with America is the worst possible outcome for Asian stability, and US-China relations. Avoiding this fate requires careful management – especially as 2011 sees no shortage of economic challenges. An unstable global recovery, the threat of protectionism, and fiscal pressures all require strong and coordinated action. Here China must play a critical role – just as it did during the global financial crisis when it did more than any other economy to pull the world out of the recession.

China will remain an important engine of global growth, even as its economy is changing. Over the next four years it will shift from export and investment-driven growth to a more balanced pattern. Growth may soon be significantly lower, if more sustainable. Inflation, currently at 5.1 per cent, is an important near-term risk. Global liquidity overhangs have led to rising input costs, but a recent credit binge is the main culprit. As investment growth and strong exports constrain capacity, abundant liquidity, strong demand and supply-side shocks (such as bad weather) make inflation inevitable. The tug of war between real estate developers and central government is also ongoing. To avoid a Japan-style bust China must stabilise property prices, while meeting the public’s demand for affordable housing.