China is the key to unwinding new global imbalances

...But emerging economies will want to moderate inflows of capital both for macroprudential reasons and to avoid becoming uncompetitive due to rising currency values. What should they do? The only two real options are capital controls and currency appreciation. But what is becoming clear is that the landscape is rife with beggar-thy-neighbour possibilities. For example, if some countries restrict capital, there is the risk that capital gets diverted to others, increasing pressure on them. And competitive non-appreciation - the revealed preference of many emerging economies given that their main trade competitor, China, has a fixed exchange rate - imposes large systemic costs, of global overheating and excess liquidity creation, as reserves pile up around the world...