We Still Believe

Cover editorial, issue no. 390 October 20 2008
Original article: [Chinese]

Unprecedented government intervention in the US has triggered heated debate in China over the country's own market reform destiny. 

Though many in China are pointing to a laissez-faire failure as evidence that China should rethink its reform, we staunchly support the current market liberalization reform path while calling for increased sensitivity to lessons that can be gleaned.

Opponents to the bailout in the west have said it would shake the US economy's foundation and encourage a huge wave of moral hazard. Proponents, on the other hand, are just as willing to call it the responsible policy decision.

In China, the intervention deepened some misgivings about the market, while others believed there was enough evidence of a market failure, thus requiring the government to take a stand.

In China, a country seeking to building a socialist market economy, many have both trusted and been suspicious of the market over the past several decades. The US has been lauded as the model market economy, and political leaders there have been persistently keen on teaching China the advantages of "letting the market decide". Now, a massive contrast splits the master's actions and their words.

Some former believers in the market economy, now watching the US financial industry collapse under the laissez-faire banner, have become instilled with distrust. At first they did not agree with the US government's massive pouring of resources into intervention, but now have come around to think it may be a good thing. At least, the intervention can still prevent a disaster led by bankers' greed.

Others have never been in favor of the market economy. Seeing the US government invest in nine major banks and seize control of Fannie Mae, Freddie Mac, and American International Group (AIG), and some European governments take over their banks, they feel affirmed that nationalization is the most advantageous.

As for China, these long-time opponents to market liberalization believe it's dangerous to continue the reform toward a market economy, and that the private economy is basically a harbinger of crises.

Both arguments are one-sided. The US government takeover is at most a short-term countermeasure to a crisis, which aims to build up market confidence through state credit. When a systematic risk occurs, the market is not able to correct itself any more. To avoid such risks, government intervention is inevitable, though it can always harm market independence.

We still believe the market economy is best. It guides economic activities with an invisible hand, rewards the successful, eliminates the defeated, and efficiently allocates scarce resources. The past two centuries of economic history have proved a government could never do better than the market. In view of this, we are firm believers of the market economy.

Because of doubts over the market system, government control has been intensified in recent policies. In some industries, there has been a second nationalization, and the private economy has been expelled. When this happens, we certainly should express our objection.

We also admit that the market mechanism isn't flawless. The government shouldn't sit idle when the market loses its self-correction ability and fails in sectors like anti-trust and environmental protection. However, that doesn't mean that government intervention can replace the market to allocate social resources--intervention only aims to help the market resume its normal operation.

For example, if the capital market crisis would likely lead to systemic risks and jeopardize the real economy, the government should intervene in time.

The failure of the US model teaches us that the financial market needs effective supervision. In addition, the government must have a power border with the market because excessive intervention between the administration and the market will likely trigger serious problems.

In China, this border will take a long time still to establish. China should not shut down its market reform process despite that it needs to learn lessons from the failures of others.