Keep an eye on China

China's leaders remain concerned at the external risks to China's continuing economic growth, highlighted by Premier Wen Jiabao's recent warning of the possibility of a "double-dip" recession in the world economy. This is probably one reason why China remains for the time being committed to a fixed exchange rate for the yuan against the US dollar.

Whether, and if so when and in what way, China may modify its exchange rate regime will be one of the most important economic policy decisions to be made in the next year or so.

I think China will eventually return to a more flexible exchange rate regime, but at a time of its own choosing, rather than in response to external pressure; indeed, the risk is that persistent external pressure may lead China to delay a move in its own best interests.

Just as Australia has benefited more than any other advanced economy from China's rapid turnaround over the past year, we will be more vulnerable to any future Chinese downturn.