Realistic Assessment Key to Revival

There have often been two poles of opinion about China's economic outlook. While most were still deeply worried at the end of 2008, optimism that an economic revival in early 2009 has begun circulating as the Spring Festival approached.

Does the optimism reflect confidence in China's economy?

We don’t think the current economic downturn will evolve into an outright recession, but we are also cautious about the quick recovery theory. Despite our consistent optimism about China’s economy, we believe it takes time for any policy - however timely implemented and well-thought-out - to take effect and revive the economy.

China is also subject to cyclical economic conditions, and its economy grows and slows from time to time. It has been six years since China entered its growth cycle in 2003, and it is only natural that it would encounter a downturn now. Such adjustment does not mean the Chinese economy is losing momentum.

China is still a developing economy. The economic benefits of having a large population won’t wear off until at least another ten years. That aside, there was still room and growth potential yet to be unleashed due to constrains in the current political and economic systems.

Reform in these areas will fuel the economy in the near future, and this is mainly why the recession theory is not so tenable.

China's economic engine still has enough fuel to power onward. The International Monetary Fund (IMF) has held that aggressive fiscal policy is a good remedy for crises, and China is among the few economies today that are able to adopt such policies.

Even with a series of stimulus measures already in place, China still has room for more aggressive fiscal policies. Therefore, as long as appropriate policies are adopted, there’s little chance of a recession, though the economy may slow down.

Yet we also call for caution against the quick recovery theory, as harping too much on such optimism may lead to the contrary.

If companies and individuals, encouraged by such expectation, made irrational decisions in their businesses and investments, a sour outcome might undermine their confidence in the economy.

If the government, fueled by such anticipation, formulated short-sighted policies in order to rush the economy back to a high level of output, it could lead to an even greater crisis.

The goal of macro-economic policy is to avoid large economic fluctuations, and shorten the adjustment cycle as much as possible so that companies and individuals are less impacted by an economic downturn.

However, it takes time for such policy to be drafted, implemented and take effect. Neither the four trillion-yuan stimulus package nor other stimulus measures can produce instant effects. The biggest possibility is that the economy will remain decelerating for some time.

Furthermore, it is unrealistic to anticipate China's economic growth to remain above 10% in the long run.

If the goal of our crisis countermeasures is solely to restore China's economy back into the ever-growing phase, we might find ourselves running on the same spot, with intended changes unaccomplished.

As a result, our urge for economic transformation would once again be overwhelmed by the blind rush towards rapid economic growth.

Given that maintaining growth is our top priority now, some quarters have advocated at all costs to achieve this goal. However, reality has revealed to us that growth alone is never the answer.

Therefore, when facing with a crisis, we should all the more apply objective analysis, calm reasoning, and deliberate decision-making, only by this way that confidence could be instilled.

China’s economic recovery depends not only on its internal factors, but also the external environment, as it is now part of the globalized market.

In fact, China’s economic recovery from the 1997-98 Asia financial crisis relied largely on the global economic revival.

The advocates of the quick recovery theory hold that China is a closed economy, and this mentality might lead them to commit the same misreading of the economic outlook like many scholars did when the sub-prime crisis first broke in the US. Back then, many Chinese scholars believed that China would escape the crisis unscathed.

Making a realistic assessment of the economic outlook will not harm the market confidence. We must understand that the market economy has its own operating principles and logic, and only by recognizing this logic that could we figure out the right analysis and formulate effective countermeasures.