Kid gloves for a cooling China

I have been travelling to China for more than three decades, but never have I encountered a Chinese leadership so uncertain of the country's future. It is little exaggeration to say that the world's most populous country is on its heels. The irony is inescapable: political leaders in the US and Asia are busy debating how best to meet what they see as the threat from China; political leaders in China are debating how best to meet the many threats they perceive to China.

Most of the threats the Chinese see to their country come from within. For three decades China has depended on robust growth, largely from ever-increasing exports, to maintain high levels of employment and raise living standards, thereby assuring social tranquillity.

This era may have run its course. Years of low economic growth in Europe and the US (and the prospect of more to come) have limited their ability to absorb Chinese goods. There is also increasing resistance to the country's policy of keeping its currency at artificially low levels to reduce the cost of its exports to consumers in Europe and the US.

Domestic pressures – the need to raise hundreds of millions more Chinese out of poverty, growing resentment over income and wealth inequality, the need to keep growth rates high – are also pushing China to find something to complement, if not replace, export-led growth. The result is that China is in the early days of a transition, one in which economic growth will increasingly have to stem from increased demand at home. Like all transitions, economic rebalancing is easier to call for than to bring about.

What makes it hard to accomplish is the inflation and a housing bubble that must be brought under control. Such pressures argue for policies that cool the economy – something that makes long-term economic sense but risks causing short-term political criticism. A further complication is that China must undertake this economic transition amid a political transition. The next generation of leaders is about a year from assuming office. The men taking over will face a daunting array of challenges in addition to those already mentioned: a deteriorating environment (when I was in Beijing recently it was possible to see only a few hundred metres and all but impossible to breathe), an ageing population and an increasingly brittle political context. The recent protests of the southern villages of Haimen and Wukan are but the tip of the iceberg: China experienced well over 100,000 political protests of some scale this past year, most over grievances from land confiscation to unemployment and the environment.

Then there are developments beyond its borders. China's heavy-handed diplomacy and expressions of special rights in the South China Sea have left it isolated in the region. As a result, there is greater interest in working with the US to balance China. Chinese officials are also uneasy over the potential showing of pro-independence forces in Taiwan's January elections. The Chinese are nervous, too, about western overtures to Burma. And the death of Kim Jong-il in North Korea has created the possibility of change on the peninsula, which could result in refugees flocking into China, conflict with, or even the demise of, North Korea. This last prospect would constitute a strategic setback. China does not want to see the peninsula unified under Seoul and in the US's orbit.

It will be tempting for some in the US and the region (especially those who see China as a rising threat) to try to exploit this state of affairs but, like most temptations, this should be resisted. It is not in the world's interest to isolate China or to increase any sense of resentment the Chinese may hold. Rather, it remains very much in the world's interest that China be integrated into global arrangements to manage the economy, limit climate change and combat proliferation. Its help is needed if Korea is ever to be unified peacefully, Iran to be prevented from gaining nuclear weapons and Pakistan is not to fail.

There is no reason to insult China. US officials should avoid repeating secretary of state Hillary Clinton's description of the South China Sea as the "West Philippine Sea”. Such statements only fan nationalist pressures in China, fed by hundreds of millions of internet users. The last thing the world should want is a China that seeks to assuage domestic frustration through foreign adventurism.

One goal should be to get China to meet its international obligations and act through institutions. We should practice what we preach. This means pursuing trade-related disagreements through the World Trade Organisation and not through unilateral action. It also argues for congressmen taking into account the reality that the renminbi has somewhat appreciated, China's trade surplus is coming down and US exports to China are at a high.

It is also helpful to maintain perspective. China may be the world's second-largest economy but per capita output is at most only one-fifth that of most developed countries. China is building up militarily, but military spending is maybe a quarter that of the US. The issue should not be China's rise, which is inevitable even if many underestimate the looming hurdles, but the character of a more powerful China. Hedging against the possibility of a more aggressive China is fine, but adopting a policy of containment would be premature and could actually help to create an adversarial relationship that would serve the interests of no one.

Richard Haass is president of the Council on Foreign Relations.

Copyright The Financial Times Limited 2011.