Recovery Measures for China's Economy

飞雪寒冰

The current downturn is the most severe economic crisis to sweep the world since the 1930s. Governments of the United States, Europe, Japan and other developed countries as well as major developing countries have issued a series of stimulus packages to boost the markets. Some of these adopted measures have started to work.

However, the economic downturn has yet to hit bottom, and more aftershocks are expected. The United States and Europe have seen some positive signs of recovery, while prospects for the Japanese and Korean economies are still gloomy. It's expected an overall recovery will take at least two or three years.

China has adopted various measures to control the downturn. With its own stimulus package, the Chinese economy performed better than expected in the first quarter, even though the economy was still sliding down a steep slope.

The real economy has stumbled with deflation. The GDP growth rate in the first quarter was 6.1 percent, 0.7 percentage points below the previous quarter and down 4.5 percentage points year-on-year. The CPI growth rate plummeted to minus 1.2 percent, China's first recorded deflation since 2003.
　
Eased monetary policy has encouraged money supply growth and an increase in credit. Positive fiscal policy moves have started to show positive effects. Many forecast indicators such as Purchasing Managers Index (PMI) have been upbeat, boosting market confidence.

飞雪寒冰

However, an excessive increase of 4.58 trillion yuan in loans during the first quarter should be a matter of concern. Government revenues witnessed negative growth in the first quarter. January, February and March saw fiscal revenues decline 17 percent, 1.2 percent and 8 percent, respectively.

Generally speaking, macro-regulation measures have started to function. But in light of the fact that the policy requiring some time to show its impact on the market, and that exporting enterprises usually sign contracts in March and April, the economic prospects for the first half of 2009 and the whole year may be clarified in May.

To deal with the crisis, we need a panoramic picture. We also need to understand that this crisis has characteristics that set it apart from the Asian financial crunch of 1997.

First, the origin of latest crisis is different. The cause of this financial tsunami was a collapse of the American real estate and finance industries, which accounted for 20 percent of American GDP. The amount of financial derivatives in the United States is eight times global GDP and accounts for 70 percent of global liquidity.

Second, the path of the crisis' spread is different. The epicenter is the United States, and shockwaves have spread to Europe, Japan, emerging economies and developing countries. The possibility of large-scale aftershocks still haunts the world.

Third, the influence of this crisis is different. A major decline in demand by developed countries will dampen export industries in emerging economies and developing countries, which may impede economic development and cause social instability.

China's economic development has three attributes that should be considered. First, its economy depends excessively on exports. The ratio of foreign trade to GDP increased to 59 percent in 2008 from 32 percent in 1998. Second, economic growth is based on exports and investments: 60 percent of the GDP growth from 1998 to 2007 was linked to investment and exports. Exports accounted for 33 percent of GDP in 2008. Last but not least, domestic consumption's contribution to GDP has been small.

飞雪寒冰

Therefore, China faces a long-term adjustment period. The crisis happened to coincide with the domestic economic adjustment after five years of fast economic growth. Downturn trends pushed the economy into a trough, where it may stay for some time.

This is the first year for the round of an economic adjustment featuring slow growth, slight deflation and high unemployment rates. Exports will continue to decrease, striking a serious blow to the economy. Consumer spending will not expand. Total retail sales growth for consumables is expected to fall to 17 percent this year from 21.6 percent last year. Registered urban unemployment will reach 8 percent.

Meanwhile, investment will be a major engine for economic growth. The fixed asset investment rate will rise by about 26 percent in 2009.  

Based on these factors, macro-regulation should be guided by scientific analysis, vigilance, and a pentad of concerns -- economic growth, employment, economic structural adjustment, social reform, and participation in a restructuring of the global financial system – which aim to bring short-term recovery and long-term development. Here are some of the detailed measures:

Economic Growth. Reviewing previous policies and their effects is necessary. Policymakers should not issue more policies in the second quarter. Instead, we should allow time for adopted policies to take effect, and then work out plans for further intervention.

Tax rebates and other supportive measures are needed to boost exports. Government spending should be leveraged to boost social consumption. For example, the government should continue subsidizing farmers who buy electric appliances.

Various measures should be adopted to increase incomes among the underprivileged in urban and rural areas. In the field of investment, government spending should allow more social funds to flow into investments, and bank lending should be channeled into the market in a more balanced way to avoid future risks.

飞雪寒冰

Therefore, China faces a long-term adjustment period. The crisis happened to coincide with the domestic economic adjustment after five years of fast economic growth. Downturn trends pushed the economy into a trough, where it may stay for some time.

This is the first year for the round of an economic adjustment featuring slow growth, slight deflation and high unemployment rates. Exports will continue to decrease, striking a serious blow to the economy. Consumer spending will not expand. Total retail sales growth for consumables is expected to fall to 17 percent this year from 21.6 percent last year. Registered urban unemployment will reach 8 percent.

Meanwhile, investment will be a major engine for economic growth. The fixed asset investment rate will rise by about 26 percent in 2009.  

Based on these factors, macro-regulation should be guided by scientific analysis, vigilance, and a pentad of concerns -- economic growth, employment, economic structural adjustment, social reform, and participation in a restructuring of the global financial system – which aim to bring short-term recovery and long-term development. Here are some of the detailed measures:

Economic Growth. Reviewing previous policies and their effects is necessary. Policymakers should not issue more policies in the second quarter. Instead, we should allow time for adopted policies to take effect, and then work out plans for further intervention.

Tax rebates and other supportive measures are needed to boost exports. Government spending should be leveraged to boost social consumption. For example, the government should continue subsidizing farmers who buy electric appliances.

Various measures should be adopted to increase incomes among the underprivileged in urban and rural areas. In the field of investment, government spending should allow more social funds to flow into investments, and bank lending should be channeled into the market in a more balanced way to avoid future risks.

飞雪寒冰

In addition, the nation's foreign reserves should be decreased. The government should stop increasing the amount of U.S. dollar-backed assets in its reserve. In contrast, more strategic commodities such as gold, oil, mines and farmland should be added to the reserve. Meanwhile, foreign reserves can be used to invest in foreign assets and resources enterprises.

Social Reform. The ultimate success of economic restructuring depends on deepening social reform. A more systematic, overall course of reform should begin. Taxes, financing, investments, foreign trade, state-owned assets management, the land transfer system, social security and administrative reform should be key areas. A reform plan can be drafted in the second quarter, and trials begin next year. By 2011, we should see the plan's overall implementation.
　　
Participating in Restructuring the Global Financial System. China should play an active role in balancing economic development and restructuring the global financial system. China should participate in establishing new rules for the financial system and its supervision, and for restructuring global financial institutions, adjusting the global monetary system, and gradually advancing internationalization of the yuan.