After three decades of breakneck growth, China overtook Japan as the world's second largest economy in 2010. The reaction in the West to China's stunning success has so far been mixed, which boils down to one question: What role will China play in the world amid its seemingly unstoppable growth?

History shows China has basically remained an inward-looking country. This tendency is most vividly expressed in the Great Wall. Despite its occasional outbursts of anger and bellicose reaction to what it regards as provocations, China harbors no ambition to become a hegemonic power. Yes, China needs to learn how to be more relaxed in global affairs. At the same time, as former US national security adviser Zbigniew Brzezinski said, Western countries should be coming to terms with China: "(A) drift into escalating reciprocal demonization" would be the worst outcome for Asia's long-term stability as well as for China-United States relationship.

China has done more than any other economy to pull the world out of recession, and may remain an important engine of global growth for some years to come. According to the 12th Five-Year Plan (2011-2015), China will shift from export-led and investment-driven growth to a more balanced pattern of economic development. As a result, China's growth rate may be significantly lower, but more sustainable.

At the same time, the rest of the world can expect China to play a more active role in areas such as fighting climate change, poverty alleviation, global infrastructure development, and reform of the international monetary system.

The world economy has welcomed 2011 with many challenges: An uneven and unstable global recovery, the threat of protectionism and fiscal pressures require strong and coordinated action. China can and must play a critical role in resolving these issues.

China has already identified escalating inflation, 5.1 percent at present, as the key near-term risk. Overhanging global liquidity has led to rising input costs, but the rise in China's credit over the last two years is also to blame. Inflation is inevitable when there is abundant liquidity and strong demand. The tug of war between real estate developers and authorities is still on. To avoid a Japan-style boom-bust, China must stabilize housing prices, and make efforts to change the supply structure of residential units to meet people's demand for affordable housing.

Crucially, China must be willing to make short-term sacrifices, such as asset price adjustments or a temporary drop in employment in some sectors, to guarantee the long-term stability of its national economy. China can leverage off its extremely strong fiscal position (19 percent debt to GDP ratio) to ensure that domestic demand does not suffer dramatically.