China’s next response to the global economic crisis should embrace opportunities with a new development model.
By Hu Shuli, Caijing 4 January 2009
The financial crisis cast a pall over New Year’s celebrations. Many gladly bid farewell to 2008 – but greeted 2009 with hope. Mankind’s optimistic nature was particularly apparent in hard-hit Iceland, where the state is bankrupt and every citizen is burdened by the financial crisis. Icelanders kept their beloved New Year’s fireworks tradition, but only thanks to the generosity of Chinese pyrotechnic exporters who extended credit.
During better times two years ago, we sounded a warning about a possible storm. Back then, it was said “happy families are all alike.” An updated version of the expression is “every unhappy family is unhappy in its own way.” It’s time to face reality. We must identify and seize opportunities presented by these hard times.
Insight comes from understanding the origin of the crisis. It started on Wall Street, spread to Europe and Japan, and spilled into emerging markets. For China, this is not just someone else’s crisis or an “external” crisis. It is a crisis of the global financial system that spares no one.
Underpinned by the U.S. dollar-based global financial system, the United States for years was able to maintain investment and high spending by borrowing heavily from other countries. A loose monetary policy powered the U.S. capital market, providing world prosperity and stability for more than 20 years. At the same time, due to the dollar-based money supply and explosive growth of the derivatives market, a huge bubble formed in the global financial system. The bubble was pricked when markets for subprime mortgages and collateralized debt obligations collapsed.
Many were slow to realize the catastrophic nature of what has aptly been called a global financial tsunami. Until recently, many failed to realize that China could not be an indifferent bystander. China plays a role in the world economy as a country with a large trade surplus, hefty investment and high savings rate. The United States is a country with a large trade deficit and over-consumption. Each lacks balance yet has complemented the other. But this circumstance could not last forever.
After enjoying rapid growth while opening to the world for 30 years, China’s economy became deeply dependent on foreign trade. Because of this model, it faced diminishing returns and other hurdles. Our 2007 warning expressed concern over excess liquidity in the Chinese financial system, which we saw as a reflection of the imbalance of China’s economic development aggravated by surplus. We feared grief would follow the follies of a financial bubble. Regrettably, our prediction came true.
A deteriorating environment overseas exacerbated problems that already existed in the Chinese economy. Now, having failed to make adjustments on our own terms through what could have been a bearable process, we are in for substantial pain. The level of distress so far has exceeded many expectations, including ours.
The financial crisis is real and the damage severe, so the government cannot shirk its responsibility to stabilize the economy. Many focus on what measures the government should take, or which policies to roll out, to ease the pain. However, from what we know about the cause of the crisis, the palliative effect of government policies will not boost productivity without conforming to business trends. Moreover, ingesting too many painkillers would work against economic rebalancing. In this sense, the Chinese government and private sector must make a distinction between short- and long-term tactics. Short-term measures can buy time needed to address long-term concerns. But real opportunity can be found only in the quest for solutions to fundamental ills.
For policymakers, the best opportunity afforded by the crisis is to rapidly change the development model. China cannot continue relying on exports. Since the beginning of the 21st century, a clear objective for the government has been to transform the growth model. “Sound and fast development” was mentioned in a report of the 17th Communist Party Congress.
However, meaningful transformation has been elusive. Although encouraging change in good times can be less disruptive and less painful than in bad times, the steps taken before the crisis grew to its current proportions were half-hearted. Urgency was lacking. Now in hard times, pressure for change is there, but action is delayed for fear of pain.
Even though the world economy is in recession and the Chinese economy is suffering the consequences of over-reliance on exports, inertia keeps the old model afloat. Now, policymakers have to recognize that economic transformation is an opportunity as well as their only choice. The price paid for moving slowly has already been high enough. We cannot afford to take additional chances. If pro-active steps toward transformation are not forthcoming, changes made in the future under pressure will be more painful and costly.
Industry leaders should seek opportunities for growth. Enterprises cannot rely on policy favors for survival, so when business growth is flat or falling, it’s time to gather strength for future growth. Currently, meeting growth targets and easing pain while costs slide can foster excuses for keeping the status quo. However, survival of the fittest is an iron law of business.
Clearly, China’s rebalancing will depend on the efforts of industries to move up the value chain, bring innovation to the services industry, and expand the domestic market. Seizing the opportunity to rebalance is better than waiting for government handouts.
Making money in 2009 will not be as easy as in past years. But seeds for future growth can be sown with brains and brawn. Opportunities for development are waiting for those who embrace the future.
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A Remedy Better Than Painkillers
China’s next response to the global economic crisis should embrace opportunities with a new development model.
By Hu Shuli, Caijing
4 January 2009
The financial crisis cast a pall over New Year’s celebrations. Many gladly bid farewell to 2008 – but greeted 2009 with hope. Mankind’s optimistic nature was particularly apparent in hard-hit Iceland, where the state is bankrupt and every citizen is burdened by the financial crisis. Icelanders kept their beloved New Year’s fireworks tradition, but only thanks to the generosity of Chinese pyrotechnic exporters who extended credit.
During better times two years ago, we sounded a warning about a possible storm. Back then, it was said “happy families are all alike.” An updated version of the expression is “every unhappy family is unhappy in its own way.” It’s time to face reality. We must identify and seize opportunities presented by these hard times.
Insight comes from understanding the origin of the crisis. It started on Wall Street, spread to Europe and Japan, and spilled into emerging markets. For China, this is not just someone else’s crisis or an “external” crisis. It is a crisis of the global financial system that spares no one.
Underpinned by the U.S. dollar-based global financial system, the United States for years was able to maintain investment and high spending by borrowing heavily from other countries. A loose monetary policy powered the U.S. capital market, providing world prosperity and stability for more than 20 years. At the same time, due to the dollar-based money supply and explosive growth of the derivatives market, a huge bubble formed in the global financial system. The bubble was pricked when markets for subprime mortgages and collateralized debt obligations collapsed.
Many were slow to realize the catastrophic nature of what has aptly been called a global financial tsunami. Until recently, many failed to realize that China could not be an indifferent bystander. China plays a role in the world economy as a country with a large trade surplus, hefty investment and high savings rate. The United States is a country with a large trade deficit and over-consumption. Each lacks balance yet has complemented the other. But this circumstance could not last forever.
After enjoying rapid growth while opening to the world for 30 years, China’s economy became deeply dependent on foreign trade. Because of this model, it faced diminishing returns and other hurdles. Our 2007 warning expressed concern over excess liquidity in the Chinese financial system, which we saw as a reflection of the imbalance of China’s economic development aggravated by surplus. We feared grief would follow the follies of a financial bubble. Regrettably, our prediction came true.
A deteriorating environment overseas exacerbated problems that already existed in the Chinese economy. Now, having failed to make adjustments on our own terms through what could have been a bearable process, we are in for substantial pain. The level of distress so far has exceeded many expectations, including ours.
The financial crisis is real and the damage severe, so the government cannot shirk its responsibility to stabilize the economy. Many focus on what measures the government should take, or which policies to roll out, to ease the pain. However, from what we know about the cause of the crisis, the palliative effect of government policies will not boost productivity without conforming to business trends. Moreover, ingesting too many painkillers would work against economic rebalancing. In this sense, the Chinese government and private sector must make a distinction between short- and long-term tactics. Short-term measures can buy time needed to address long-term concerns. But real opportunity can be found only in the quest for solutions to fundamental ills.
For policymakers, the best opportunity afforded by the crisis is to rapidly change the development model. China cannot continue relying on exports. Since the beginning of the 21st century, a clear objective for the government has been to transform the growth model. “Sound and fast development” was mentioned in a report of the 17th Communist Party Congress.
However, meaningful transformation has been elusive. Although encouraging change in good times can be less disruptive and less painful than in bad times, the steps taken before the crisis grew to its current proportions were half-hearted. Urgency was lacking. Now in hard times, pressure for change is there, but action is delayed for fear of pain.
Even though the world economy is in recession and the Chinese economy is suffering the consequences of over-reliance on exports, inertia keeps the old model afloat. Now, policymakers have to recognize that economic transformation is an opportunity as well as their only choice. The price paid for moving slowly has already been high enough. We cannot afford to take additional chances. If pro-active steps toward transformation are not forthcoming, changes made in the future under pressure will be more painful and costly.
Industry leaders should seek opportunities for growth. Enterprises cannot rely on policy favors for survival, so when business growth is flat or falling, it’s time to gather strength for future growth. Currently, meeting growth targets and easing pain while costs slide can foster excuses for keeping the status quo. However, survival of the fittest is an iron law of business.
Clearly, China’s rebalancing will depend on the efforts of industries to move up the value chain, bring innovation to the services industry, and expand the domestic market. Seizing the opportunity to rebalance is better than waiting for government handouts.
Making money in 2009 will not be as easy as in past years. But seeds for future growth can be sown with brains and brawn. Opportunities for development are waiting for those who embrace the future.
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