By Lau Nai-keung (China Daily)
Updated: 2007-09-17 10:51

If the American government steps in, which I think it will sooner or later, like the Hong Kong experience, the country will have to pay a hefty price for people's excessive greed. There will be a slow recovery, and the position of the US dollar in international finance will be weakened.

The lesson is, since we know a big financial storm is on the way, it is advisable for our government to take early action to reduce the loss. Conventional monetary measures like raising interest rates and reserve requirements of the banking system are not as effective in this country, as most speculators do not borrow money from banks. Most of them do not even have a personal checking account. It will instead hurt our enterprises which rely more on bank loans and credits for their normal operations, and ultimately will hurt economic growth.

That is why I am all for increasing the supply of stocks in the market, both in the mainland and in Hong Kong to prevent it from rising too fast and to engineer for a softer landing when the crunch comes. Together with some administrative measures, a not too hard landing is achievable.

Most commentators think that China will be immune to the upcoming financial crisis. From disclosures so far, the exposure of the Chinese banking system to the subprime market, though more considerable than previously expected, is well within safety limits. In the short run, funds will flow this way, as witnessed by the recent performance of the Hong Kong stock market, and there will be substantial pressure on Chinese mainland to appreciate the yuan. In a global economy, we can never be immune, and should therefore be prepared. Fortunately this time the combined foreign exchange of mainland and Hong Kong is formidable enough to fend off any attempted attack.

On the other hand, there are growing concerns that the US financial meltdown will lead to a global recession, and this in turn will hit China badly. China is one of the most open economies in the world, with exports amounting to over 40 percent of its GDP. The US is China's largest trading partner. When the US sneezes, China is likely to catch a cold. Moreover, the repercussions of US economic performance are worldwide, and that means our exports to other countries will suffer also.

Like in the Asian financial crisis a decade ago, China's economic stability and prosperity is vital to the whole East Asian Region, if not for the world economy. Simply by maintaining our momentum in the economic storm will be a great service to the international community.

Our economy is exported-oriented with persistent overcapacity, and a general export recession will lead to excess inventory and increased unemployment. It is therefore not too early to kick-start internal consumption.

The author, from Hong Kong, is a member of the National Committee of the Chinese People's Political Consultative Conference

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