Seeking for the Source of Confidence

Cover, issue no. 408, March 2 2009
Translated by Liu Peng
Original article: [Chinese]

"In hard times we need to be even more confident than usual," said China's president Hu Jintao in a speech delivered on Feb 23 when chairing a political study group meeting.

But to do that, we must first understand the root problem and identify the source of confidence we may draw from. Though the US financial crisis has kick-started a global fallout and dragged China into a slowdown, the EO believes the real problems have emanated from within.

The US development model, mainly driven by technology and consumption, is the polar opposite of China's.

China is highly reliant on investments and exports, a growth model shared by many developing countries and emerging markets.

As the US economy slipped, so have Chinese exports. Though we understand the correlation, we cannot help but ask: what happen to China's domestic market? Why haven't our relentless policies since 1998 to enlarge domestic demand provided some relief? This is evidence that our domestic market is problematic.

Since 1995, the government has launched a series of revamps to create super-sized state-owned enterprises (SOEs) through asset consolidation and by granting monopoly status. The rise of SOEs has inevitably squeezed out smaller private firms, who could only turn to exports as an outlet.

Though in past decades, the government pocketed increasing revenues as the country's GDP growth soared, the growth of per-capita income has climbed at a much slower rate. No wonder our domestic markets are weak.

Our market-oriented economy is still in its infancy, and much more is needed to perfect it. As the country goes down the uncharted road of market reform, it understandably wants to be guarded, and wants to exercise as much control as possible.

But looking back at our accumulated experiences, we have learned that macro-economic controls may reduce market volatility but they cannot eradicate cyclical fluctuations, as all economies go through ups and downs.

In China, there's no question about whether we need government intervention, but we may ask how much intervention is reasonable, especially when facing an on-going economic slowdown.

Undoubtedly, large-scale government investments could stimulate the economy; however, this strategy would also perpetuate the dependency of the Chinese economy on investment-driven growth, strengthen a government-led economic mechanism, and bolster the ranks of an army of out-dated SOEs.

Ultimately, these setbacks would affect China's economic restructuring, and it would also bring huge risk for the next cyclical downturn.

Under the current circumstances, we need to look squarely into the root-problem of our economy. If the US answer to halting its economic crisis is to strengthen market regulations, China's fix is just the opposite -- we believe further liberating the market is key for China to walk out of the present slow down.

Let businesses run according to market mechanism, and let the people enjoy the fruits of growth; remove the over restraining government intervention, and release the vitality of a private capital driven economy.

We believe if given a fair playing field for competition and market-oriented economic conditions, Chinese private companies would be the firsts to break free from the cyclical crisis and spur the economy to turn around; they would be the source of market confidence.

An economist once summed up China's 30 years of opening-up and reform as "crisis-driven reform". Indeed, the fallout of the current global financial crisis has again offered an opportunity for further improvement. China today faces a host of systemic problems, both social-economic and political; it is time we met them head on.