It is easy to get over--excited about China. When bulls aren't predicting near infinite-growth and competing to proclaim earlier and earlier dates by which China's economy will become the world's largest, bears are proclaiming the country on the verge of collapse. In the past two months informed consensus seems to have shifted from the former view to the latter. To some extent this represents a welcome dose of reality. In spite of outstanding growth rates in 2009, China nonetheless has serious structural problems that were actually exacerbated by the quality of last year's growth. Many observers seem now to be waking up to this fact.

That China has structural problems should not have surprised us. No one could have reasonably hoped that the country's institutions would adapt as quickly as its underlying economic and social systems have changed, and institutional mismatches must result in periods of difficult adjustment. This has been true of every rapidly developing economy in history.

But we need perspective on how China is likely to adjust. As with Japan in the 1980s, China's export growth relative to the rest of the world has created one of its most serious mismatches. When its share of global trade was tiny, China's traditional response to domestic economic contraction – to boost investment in infrastructure and production capacity – had a negligible impact on the global balance of payments. The subsequent surge in exports could easily be absorbed by the rest of the world.