China and the US must anchor their relationship on sound economics to drive 21st-century globalisation

China has essentially pegged its currency to the dollar for two decades. As both economies are quite open, they have inevitably become entangled. One underappreciated point is how important China has been to the profitability of multinational companies. For many tangible products, China has become the largest market in the world. Moreover, as China encourages production through cheap capital, free land and low taxes, foreign companies have been able to charge a premium on anything that China couldn't make.

How the 21st century pans out depends on how China and the US relate to each other. If they form an effective partnership, the globalisation that began after the cold war will continue, and the resulting income gains would enable the world to deal with poverty, global warming, ageing, pandemics and other looming global crises.

If the two become adversaries and engage in a new cold war, the world may suffer stagnation for decades to come.

President Xi Jinping is visiting the US this week. There are many thorny issues on the table, including cybersecurity, the South China Sea and the extradition of people wanted by the Chinese government. But far more important is for both countries to anchor their relationship on sound economics. It is virtually impossible to resolve all their differences now. But, if the economics works, other issues will resolve themselves over time.

The US has been the ultimate source of demand for almost every economy since the second world war. With exceptionally high national indebtedness and a low savings rate, however, it can't do the same in the future. Still, the US remains the source of new technologies that drive productivity gains; that is, corporate America has the capability to reap high profitability in the global economy.