The most important role China can play on the international stage is to deal with protectionism and global imbalances, while domestically, the country should use public expenses to bolster domestic demand, said Stephen King, group chief economist of HSBC.
"I think the first thing China can do, as other countries should be doing, is fight against protectionism, or its many forms, not just from a trade perspective but also from a capital perspective," King told China Daily.
Avoiding protectionism should be one of the key issues that ought to be addressed at the upcoming G20 summit, King said, as the continuation of the past 30 to 40 years of globalization depends on the free flow of trade and capital across borders.
"If those flows dry up (not just trade flow but also capital flow) it will be damaging to the global economy, and it will be particularly damaging to some of the emerging markets, including China," King said.
As each country tries to defend its own interests in a worldwide economic downturn, protectionism can take many different forms.
King said global institutions should be strengthened to fight protectionism.
"The reason is that, we have a series of national and regional policy makers, but we also have a global capital market. So, there is some sort of imbalance between the two," said King. "You have two choices, either raise the regulation aspect to the international level, or you reduce capital market to a regional level. But if you take the latter approach, you will lose a lot of the benefits that accrued due to globalization over the last 20 or 30 years. Free flow of capital has been very important in delivering particularly rapid growth in emerging markets."
The second thing China needs to do, according to King, is to have a frank discussion with the US about the global imbalance.
"In fact, global imbalance has made some kind of indirect contribution to the crisis; for instance, the distortion to capital market pricing has contributed to the scale of the financial crisis," said King.
At the moment, it is clear that China is still playing an important role as a source of consumer demand within Asia.
China's exports will not do very well for the time being because demand from other parts of the world has fallen. That's why the rebound of the economy in China becomes especially important, as what China loses in exports could possibly be gained back on the domestic front.
"The policy to help stabilize the Chinese economy at the same time also has advantages of minimizing or reducing the scale of global imbalance, which is a good thing for both China and other parts of the world," King said.
China enjoys significant advantages compared with other countries, due to the massive infrastructure projects taking place here.
Although many forecasts suggest that economic activity will be stabilized in the second half of the year, King said HSBC's forecast suggests that such activity would stabilize at a very low level, and therefore, he does not expect an immediate return to business as usual.
"Even with stabilization, it can take quite a while to return to where the global economy was two or three years ago," King said.