Asian Development Bank (ADB) released its annual Asian Development Outlook 2010 on April 13. In terms of each Asian country, this report specifically reviews its economic performance in 2009, points out underlying economic challenges as well as possible proposals to resolve them, and finally aims to forecast its economic prospect.

As for China, this report concludes China's economic performance in 2009 as a typical V-shaped economic recovery, underpinned by strongly expansionary fiscal and monetary policies. Although aggressive fiscal and monetary stimulus help China achieve outstanding economic growth, further economic development, as the report suggests, still needs reform.

Issue 1: The Timing Back To Normalization

Governments and monetary authorities responded quickly to launch a series of stimulus, stabilizing economy in the early stages and later shoring up flagging GDP. When the economy rebounds, policy makers have to reverse its stimulus. But the dilemma of when to start reining in the stimulus arises.

China's stimulus plan is aggressive. So it needs much patience for the Chinese government to bring stimulus policies back to normalization. This report does not propose detailed timetable for China to operate, but historic examples are illustrated to highlight importance of this issue. When the government tightens too early, the economy might be pulled back to recession. For example, the 1937-38 US recession that came in the wake of the Great Depression is a frequently cited cautionary tale of the effect of pulling back policy support too soon. In the mid-1930s, signs of recovery prompted US policy makers to raise taxes, reduce spending, and tighten money supply-actions which quickly pushed the economy back into recession. Alternatively, normalizing too late may lead to higher inflation and unsustainable fiscal deficits.

Issue 2: Inflation

This report suggests that commodity prices have begun to trend upward in tandem with the global economic recovery, with a particular thrust coming from demand by emerging market economies. For example, the energy commodity price index by January 2010 had risen by 57 percent relative to the low base of a year earlier.

But higher prices for oil and commodities, coupled with a narrowing of the economy's output gap, will put forward pressure on prices. China is highly reliant on importing raw materials, so inflation pressure due to price surge on importing commodities is large.

Issue 3: Defective Economic Model

This report also discusses the current economic model in China. Although loss of economic engine in terms of exporting is compensated by massive fiscal and monetary stimulus from the Chinese government, this model can help economic growth in the short run, yet long term economic development can hardly be achieved without further structure adjustment. This report first highlights the importance of private consumption's contribution to Chinese economy, and some suggestions are recommended: a strengthening of the social safety net, and provision of well-targeted public goods, such as education, health care, and affordable housing, as well as higher incomes.

Furthermore, China needs develop its services industry to adjust economic structure. There are many areas needing improvement, such as excessive market concentration and entry barriers, restrictions on direct foreign participation, incentive bias toward manufacturing, inefficient allocation of capital, incomplete urbanization and labor market rigidities, and underinvestment in education and training.

Third, China could develop more sustainable model, which is reliant on technology, innovation, and skills, instead of the current high energy-consuming and environment-unfriendly growth model. Then, large invest should be allocated to research, and education.