The Chinese economy has emerged from deflation and entered a new stage of economicgrowth in late 2002 and early 2003. The sudden pick up of the economy has led to aworsening of structural imbalance and inflation is rising. The Chinese government has tofind a fine trade-off between growth and inflation. While the central bank needs to tighten itsmonetary policy, the government may need to use a more expansionary fiscal policy to offsetthe contracting effect created by the tightened monetary policy. The structural imbalance andpartial overheating remind us that Chinas economic reform still has a long way to go. TheChinese government must speed up its reform process. While the long-term prospect forChinas economic rise is promising, it may be necessary for the Chinese people to preparethemselves for a harder time ahead. The Chinese economy has emerged from deflation and entered a new stage of economic growth in late 2002 and early 2003. The sudden pick up of the economy has led to aworsening of structural imbalance and inflation is rising. The Chinese government has tofind a fine trade-off Between the central bank needs to tighten itsmonetary policy, the government may need to use a more expansionary fiscal policy to offset the contracting effect by the tightened monetary policy. The structural imbalance andpartial overheating remind us that Chinas economic reform still has a long way to go. TheChinese government must speed up its reform process. While the long-term prospect forChinas economic rise is promising, it may be necessary for the Chinese people to preparethemselves for a harder time ahead.