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When Optimism and Reality Collide

03-04 15:51 Caijing

Upbeat forecasts about a worsening economy overlook what China really needs for a turnaround: structural adjustment.


By Hu Shuli
From Caijing Magazine

Spring is in the air, no doubt rousing many of the optimistic voices we’ve heard lately about the economic situation.

 

Some say that as soon as government’s 4 trillion yuan stimulus plan hits the road, the most critical stage of the current economic crisis in China will be over. They’re confident that slowing growth in 2009 will no longer be an issue.

 

There is another popular view: That easier credit will improve the vitality of Chinese enterprises and the private sector, triggering an unstoppable surge in growth. A rapid expansion in credit, a temporarily roaring stock market rally and rebounding steel prices all seem to support this bullish view.

 

We find it difficult to share this optimism. We remain deeply concerned about the latest economic trends.

 

Admittedly, China is in better shape than other countries already deeply mired in the economic crisis. Huge foreign exchange reserves, a sound fiscal position, a relatively solid financial system and ample liquidity all point toward a special advantage. The nation’s relatively low level of development leaves room for growth, as long as additional reforms generate new energy.

 

But these advantages are relative. Undeniably, the global crisis has engulfed China. And precisely because China is on the periphery of the economic shakeout, the impact is belated. As the effects become more apparent, many of the typical shortcomings of an economy in transition are being exposed.

 

As the saying goes, fortune is embedded in adversity. But the opposite is also true. As stormy winds buffet the country, inside and out, China’s economy faces as many if not more challenges than others.

 

Most worrisome now is the economy’s downward slide and subsequent reactions. The official media reported January’s economic data with a positive slant, describing the situation with expressions such as “bottoms out” and “slightly warms up.” Such optimism is questionable.

 

This year’s Spring Festival holiday period began in January, shortening the month to 17 working days. As a result, some industrial production data were incomplete. During the same period, industrial output in Singapore fell more than 29 percent, while Taiwan’s output plunged 43 percent. Production in China’s industrial sector could not be out of line.

 

Moreover, China’s Consumer Price Index and money supply figures for January underscored a basic extension of downward trends posted in previous months. With month-on-month CPI stabilizing, figures showing a sharp growth in money supply could be subject to debate.

 

More importantly, the economic crisis is deepening around the world. Not only have the dire financial straits failed to ease globally in recent weeks, but the crisis in manufacturing is spreading. The International Monetary Fund took an unusual step by slashing its global economic forecasts for 2009 twice over the past four months, from 3 percent in October to 2.2 percent in November, and again to 0.5 percent in January.

 

If the IMF’s latest prediction comes true, the world will experience the most sluggish growth since World War II. Some even predict negative growth, saying the economic slide could reach the level of the Great Depression in 1930s. Given the fact that the global economy faces daunting challenges with structural adjustment, further deterioration is possible.

 

It’s reasonable to expect a time gap for stages of economic trouble between developed and developing countries. November was the first month in which China and other developing nations felt the impact of the woes already brewing elsewhere for months. Bank lending rose in January in China, but the positive impact will be delayed. Similarly, strong and even unpredictable shocks could be expected to surface in China some time after other countries take their hits.

 

Serious economists are offering conflicting forecasts about the Chinese economy. Some expect an economic recovery curve to follow a U-shape. But most say it will take a W-shape -- a worrying prospect indeed. There is scant evidence to support a V-shaped recovery, or the view that the Chinese economy has already risen from the bottom. Of course, experts will always express different views. But we should not let wishful thinking obscure reasonable analysis.

 

In fact, while enjoying spring hopes and pining for economic recovery, we should focus on the quality of China’s rebound. Strictly speaking, a recovery’s quality is directly related to an economy’s position in time on a W-shaped rebound. Therefore, we must think about preventing imbalances when applying counter-cyclical policies.

 

Since the huge U.S. economy drives the world economy, its inability to recover could prevent the world economy from rising off the bottom. Only by resolving China’s structural imbalance can our economy truly “de-couple” from the United States. But this is what’s necessary for China to realize sustainable economic recovery.

 

At a recent meeting, the Politburo spelled out its goals of “expanding domestic consumption, maintaining growth, structural adjustment, improving quality, tackling reform, increasing vitality (of the economy), focusing on livelihoods and promoting harmony.” The overall message is clear, but expectations for a rollout of more stimulus policies are being heard in some quarters. If existing policies indeed aim to use investment to ensure growth – tossing 4 trillion yuan into national projects to stimulate growth -- then let consumer spending take the lead. Raise the consumer portion of the nation’s GDP by opening up the service sector, increasing social security payments, and reforming the household registration system. These are the kinds of steps that can turn the economy around. But these types of investments call for better awareness of the crisis, as well as more wisdom and courage.

 

So much hope is now being pinned on the National People’s Congress as it convenes in Beijing. As long as NPC delegates face up to the harsh realities of the economy and genuinely represent the people – and decision-makers map out policies with foresight, flexibility and relevance -- we think the Chinese economy will recover. Even though the economy is still in deep winter, we expect to feel a gentle spring breeze in the not-too-distant future.

 

Full Article in Chinese: http://magazine.caijing.com.cn/2009-02-28/110075298.html

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