A Shift is Needed, But Not Overnight

By Editorial Staff
Published: 2009-04-13

Cover editorial, issue no. 414, April 13 2009
Translated by Tang Tang
Original article:

Chen Deming, head of China's Ministry of Commerce, recently wrote in the Communist party magazine Qiushi that earnings from Chinese exports could trickle down to compensation, and ultimately end up stimulating domestic consumption. He came down against certain popular opinions in China, including that the country relied too heavily on exports, and stressed that although a withering global market has sapped demand for Chinese goods, it has also presented great opportunities. Chinese enterprises needed to push abroad under such circumstances and promote Chinese exports, he concluded.

Chen's arguments come at a sensitive time for China's exports. As the Canton export fair opened this past week, the export industry was not optimistic - official data just released showed another slide in China's export value in March.

Nonetheless, it may have been good news for some. At the beginning of the financial crisis, scholars argued that the pushing out of some small and medium-sized firms from the market would help force industries to upgrade, and some local officials in suit turned their backs on low-end manufacturers.

In the past few years, the government has long sought to transform the economy from a export-oriented model to a consumption-oriented one, while the Ministry of Commerce strove to reduce the trade surplus. But the economy's restructuring could not be completed within one day, and a consumption-oriented economy never meant wholly abandoning foreign trade. Eagerness for an overnight success could only lead to adverse consequences. In this senseChen's article reflected a realistic attitude.

We believe this was a positive sign that the Chinese government has a deep understanding of the necessity of economic transformation, and that the consumption-oriented model would remain the core of future policy. At the same time, it also meant China understood it needed to be patient throughout the process.

China has benefited significantly from its joining of the World Trade Organization, and China's opening up was a large factor in its economic successes. The crisis has demanded a response from all major economic bodies, and in this sense, China needed to stimulate domestic consumption to fuel development, while the U.S. needed to save more. Both, however, are long term goals. So from a short-term point of view, foreign demand must still serve as the engine of the Chinese economy for a period of time.

Thus, any policy should be based on this premise. Chinese exports touch upon a large swatch of small and medium-sized businesses, and with them a large chunk of China's labor force. If these businesses shut down, the consequences would be devastating. Indeed, bankruptcies that have already hit the pearl river delta region have already undermined economic performance in China's interior.

Thus it is an urgent time to stabilize exports. Some local governments have repulsed the export-oriented economy, charging such enterprises as lower level, which would not help economy transformation, and would probably add much volatility. Realistically speaking, not much room was left for traditional export support policy, such as export tariff rebates. The out-going strategy Chen referred to was an active alternative to promoting exports.

But it was also clear that China's direction was still a consumption-oriented nee. As Chen said, expanding the domestic market would be slow and limited should we rely only on its own cycle. Maintaining foreign demands would actually buy time and earn resources for economic development, create wealth, as well as provide sufficient capital for China's social welfare net, all foundations for economic transformation.

So, the current logic behind improving exports was different from that of some years ago. Even if we are successful in expanding the international market, we would face more international trade protectionism without expanding the domestic one. In the meantime, if the RMB exchange rate remained under control, China's foreign reserves would continue to balloon. China would be bothered by its 2 trillion US dollars foreign currency reserves, and only sink deeper would probably mire in a dilemma if that continued to expand.