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Recession an opportunity for economic transition

By Zhang Monan (China Daily)
Updated: 2009-01-19 11:38

Last year proved unusual for China's economy and the world's as a whole. The financial woes fueled by the US mortgage crisis quickly spread to the rest of the world and have shown no signs of mitigation till now. On China's part, its fast-growing economy also suffered an unprecedented challenge in five years.

This year will also not be easy for the nation, although a new stimulus plan is expected to come. The central government announced a $586 billion investment package late last year to contain economic slowdown. Whether or not the nation could triumph in the battle against the prolonged predicament will determine if it will succeed in promoting a sustained growth and its emergence as a big power in the international arena.

However, the worst global financial misery since the Great Depression has also posed rare opportunities for the country to push for adjusting its slow-progressing economic structure and transforming its past growth mode. A new international economic order is also due to be reframed after the crisis.

It is expected that the crisis will put more pressure on China to step up transformation of its economic growth model from the previously extensive to an intensive one. China's development in the past decades shows that in the face of each of the major economic hardships, the country always chose to accelerate reforms and consolidate its economic foundation. The country's long-expected upgrading of industrial structure, technological progress and cultivation of a more efficient human resources market will greatly help realize such transformation.

Because of the global financial crisis, China's outside economic environment continues to worsen, prompting the export-fed economy to turn to the domestic market for a sustained growth. An ever-shrinking external demand makes it more urgent for the country to expand domestic demand and step up industrial restructuring. It is expected that the country's upcoming second round of stimulus program will lean more toward spurring consumption and promoting system reform and industrial restructuring.

In laying out this year's macroeconomic policies, the government should cut down tax to mitigate enterprises' production cost. Also, workable measures should be taken to lower the threshold for unofficial capital's access to some fields. This will help improve the current unreasonable investment structure. The announced stimulus packages indicate that the government is still centering spending on infrastructure construction and some basic industries.

However, such investment-driven economic model would find it difficult to prop up a sustained employment expansion. At the same time, the country's huge amounts of social capital have no ideal fields for investment given that a higher market access standard is in place. Thus, the government should open more fields to unofficial capital and provide them convenient access to some monopolistic sectors.

With the launch of the country's colossal demand stimulation plan, signs have emerged that China's economic engine has been transformed from the previous one dependent on outside demand to one reliant on domestic demand. In this process, the key is to how to develop a consumption-driven economy as soon as possible.

As an emerging power, China should develop its own demand and consumption market commensurate with its economic muscle and construct a matching economic and financial structure. To this end, the nation should further improve its social security and income distribution network to curb the declining consumption and deposit proportion.

Also, the country should make unremitting efforts to change its excessive dependence on international capital and try to cultivate and develop a homeland capital market. It is true that the large-scale inflow of international capital to China did help step up its industrialization, marketization and integration to global economy.

However, a nation's economic development is overwhelmingly decided by its homeland capital and utilization efficiency. Excessive dependence on outside capital will drive economic growth for long. With three decades of rapid development, China now takes an increasing share in the global capital market and it also possesses a total of $60 trillion banking assets and $1.9 trillion in foreign reserves.

However, all these have changed the country's low-quality capital character. It has posed a severe challenge to the country's still weak foundations of economic and financial pattern. How to press ahead with a major shift to its capital model and improve its competitiveness in the global capital market is of great significance for the country's emergence as a big power.

There is no doubt that the cyclical adjustment going on in the current global financial market has brought rare opportunities for global capital merger and purchases. Under these circumstances, China should not focus its capital export on easing its foreign reserves excess and narrowing trade surplus alone. It should take capital export as the core of its long-expected financial reform and development strategy.

For the sake of readjusting its industrial structure, China should also make full use of its huge foreign reserves in an effort to promote a further merger of the country's financial and industrial capital. An improved industrial efficiency will help ease the nation's pressures from a dwindling outside demand. At the same time, it should make active measure to take a firm grip on emerging chances brought by declining oil prices to accumulate more cheap resources reserves to push forward its industrialization process. The establishment of a reasonable global capital distribution is expected to help develop the nation into a global capital source from the world's factory status.

The author Zhang Monan is an economics researcher with the State Information Center