Global Crisis Presents Challenges and Opportunities for China’s Economic Reform

The massive bailout of Western financial institutions is remaking the international financial order, spurring debate in China about what adjustments and financial instruments need to be on the table for Beijing to address domestic challenges and the international financial crisis. These calls come amid the announcement by the National Bureau of Statistics (NBS) that China’s GDP growth rate in the 3rd quarter of 2008 slowed to 9 percent, its slowest rate in five years, prompting concern from Chinese economists about whether or not the Chinese economy will experience a hard or soft landing. China’s ability to cope with a protracted economic downturn has a low threshold because of the risks it poses to social and political stability: 8 percent growth is the minimum threshold that most economists’ estimate can stave off rising urban unemployment, where the Chinese population is growing by 20 million a year due to urban migration (New York Times, October 22). At the 10th anniversary meeting of the “Chinese Economists 50 Forum” (https://www.50forum.org.cn/) on October 19, a non-governmental forum of expert economists in China’s private and public sector, Chief Economist Ha Jiming of the China International Banking Company argued that the U.S. banking meltdown may put the Chinese economy on course for a hard landing, an investment term used to describe when the economy goes directly from a period of expansion to a recession. According to Ha, there will need to be readjustments to the Chinese economy on many levels (Nanfang Daily, October 20).

The Chief Economist for Bank of China International, Cao Yuanzheng, warns that economic planners in Beijing can not underestimate the impact of the U.S. banking meltdown on China’s real economy. Although Chinese financial institutions were not as exposed to the risks affecting developed markets and some emerging markets (Beijing Review, October 6), Cao said that the current crisis is still spreading. If the subprime lending crisis further depresses U.S. GDP growth, consumer demand in the United States will likely contract, hurting Chinese exports. Cao added that all of the plans on the table offered by the government are long-term solutions, which could spell trouble for the Chinese economy in the near term (Nanfang Daily, October 20).

There was a consensus among economists from the private and public sector that the government needs to play a more proactive role in guiding the Chinese economy out of its financial doldrums. However, there were many differences in opinion on the priorities and approach (Nanfang Daily, October 20).

The CCP’s Central Committee Policy Research Deputy Director, Zheng Xinli, said that the government is adopting the wrong set of policies for relieving the contradiction facing China’s economic system. Since this is likely to be a global, long-term recession, Beijing needs to emphasize stimulating domestic demand to offset the impact of falling exports (Nanfang Daily, October 20).

A National Development and Reform Commission (NDRC) Research Center researcher, Wu Jingling argues that the most important thing right now is for Beijing to adjust China’s economic growth model. Wu argues that, in fact, the Chinese economy was already experiencing downward pressure before the U.S. banking meltdown (Nanfang Daily, October 20).

China Galaxy Securities Company Limited Chief Economist Zou Xiaolei points out that there is one major inconsistency in talks about stimulating domestic demand. Zou argues that current plans are all considering different policies to coax money from people’s savings, but it will be extremely hard to do this while China’s social security system is underdeveloped and under stress. Zou said that stimulating consumption requires reform in income allocation (Nanfang Daily, October 20).

Others argue that the U.S. banking meltdown will likely restructure the international banking system, and in this critical transitioning phase of the international financial order, China needs active participants in constructing a new financial charter.

Deputy Secretary General Tang Min of the China Development Research Foundation under the State Council said that China will suffer some tactical losses, but this is the biggest strategic opportunity that China has encountered in the past 50-100 years. Many Chinese economists argue that China should use this opportunity to internationalize the Renminbi so that it will be an important player in future transaction in the global monetary market. Along the same line, Zheng argues that China should adopt a “go-out” policy to use the 1.9 trillion foreign reserves to address China’s two biggest long term development problems: technology and energy. Zheng argues that China should purchase overseas technology to overcome the bottleneck in China’s technological advancement; and in the overseas market, China should use its reserve to purchase more strategic resources, commodities like iron, cooper, aluminum and oil. There are indicators that such efforts are already underway. Wang Lili, vice-president of the Industrial & Commercial Bank of China (ICBC), recently revealed that the bank plans to double its current overseas asset volume from 5 percent to 10 percent within three years (Reuters, October 21).

In an essay published in the China Securities Journal, Ba Shusong, deputy director of the Financial Research Institute of Development Research Center under the State Council, acknowledged that the U.S. debt and trade deficit are “to some extent, related to China’s enormous foreign reserves and trade surplus.” He added that “China should voluntarily readjust the current growth mode” (Beijing Review, October 21).

Wu Xiaoling, deputy director of the Financial and Economic Committee of the National People’s Congress, lashed out at decision makers for having been “excessively cautious” and lacking in innovation (Caijing, October 7). Wu recommends that streamlining the pricing mechanism, changing the economic growth model and controlling inflation should be the major priorities for Beijing’s economic planners.

Meanwhile, China’s State Council announced several measures to address weak exports and the volatile real estate market, which has dulled industrial production. These measures include raising export tax rebates on toys and textiles to both 14 percent to help China’s factories weather the global economic crisis. These factories, which have been the backbone of China’s economic growth, have been hard hit by the downward pressure on the global economy. Chinese state media reported that more than 50 percent of China’ toy exporters had gone out of businesses in the first seven months of 2008 (Xinhua News Agency, October 14). The governor of the People’s Bank of China, Zhou Xiaochuan, indicated that more incentives may be required to increase domestic demand. These measures may include further interest rate cuts, which the government has done twice in recent weeks, and an increase in infrastructure spending designed to stimulate economic growth (Reuters, October 16). China’s own version of the economic stimulus package may result in a slower appreciation of the yuan against the dollar (South China Morning Post, October 21).