OPINION> Commentary
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OPINION> Commentary
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Long-term strategies key to battling crisis
By Lou Jiwei (China Daily)
Updated: 2009-04-02 07:48 In the past year, the financial turmoil stemming from the sub-prime mortgage markets in the US, ultimately led to a global financial and economic crisis. Compared with previous crises, this bears some distinctive features. First, this financial crisis originated from the developed countries with relatively sophisticated financial systems; while the previous crises mainly started from the emerging markets. With lessons drawn from the Asia Financial Crisis of 1998, East Asian countries have gradually adjusted and improved their macro policies and economic structures, so the impact of the current crisis on them has been relatively mild. Second, apparently the financial crisis was caused by the burst of asset bubbles, but the root cause is the imbalances of the existing global economic development model. The crisis reflects the unsustainability of this model and the genesis of the crisis lies in structural problems. Take the US for example: it feartures over-consumption, high-leverage and a high-risk virtual economy. Of course, China has its own structural challenges.
Third, due to the above mentioned two characteristics, as well as the economic and financial globalization and macroeconomic imbalances, the depth and time span of the current global economic recession may well exceed a normal crisis, and its impact on the financial stability and economic development may well exceed previous estimations. The recovery from this economic recession would most likely be an L type, instead of a V or U. In the face of crisis, the major economies have taken unprecedented measures to address it, such as pumping liquidity into the market, lowering interest rates, rescuing domestic financial institutions and adopting various economic stimulus policies, which help to forestall the further spread of the crisis. Because the measures taken are mainly short-term oriented, which can only temporarily relieve the pain of economic recession instead of adjusting the economic structure from the perspective of long-term and healthy economic development, the policy measures may not be as effective as expected. According to the recent economic data, global financial markets have yet to resume normal functioning and the downward trend of the real economy has yet to be reversed. But, as the crisis worsens, consensus has begun to develop and the responses should bring about opportunities for reform. During the Asia Financial Crisis in 1998, the Chinese government adopted proactive fiscal policies and other crisis response measures, on the one hand; and deepened economic restructures, such as SOE, financial sector and housing reform, and entering the WTO on the other. Through those measures, the economic viability has been enhanced and domestic demand has been increased. After this of crisis started, as mentioned by Premier Wen Jiabao at the World Economic Forum, the Chinese government has acted in an active and responsible way, promptly introducing ten measures to shore up domestic demand and avoid a rapid economic decline. Meanwhile, China continues to strive to solve some existing structural problems. Seizing the opportunity of international economic structural adjustment, we have tried to accelerate the formation of an economic pattern, which is mainly driven by domestic demand, particularly consumer demand. For instance, the Chinese government will aggressively push forward social security reform, increase basic retirement pensions, unemployment insurance and work-related injury compensation and strive to establish a basic medical care system covering both urban and rural residents in three years. The objective is to promote consumption. Only by combining measures addressing short-term difficulties with strategies promoting long term economic growth, can we turn the crisis into opportunities. Despite the severity of the current crisis, China will be one of the earliest countries to emerge from the distress. As an emerging market economy, China's market system is not highly sophisticated, so there is still ample room for structural reform and demand expansion, which underlines opportunities amidst the crisis. Based on lessons and experience learned from the practice of sovereign wealth funds (SWFs) of other countries, the Chinese government established the China Investment Corporation (CIC) in October 2007. Last October, representatives from 26 SWFs and IMF jointly drafted and adopted the Santiago Principles, which encapsulate SWFs' basic features, governance structure and investment policies. Those principles should help strengthen the stability of the global system and further safeguard open investment environment and free capital flows. CIC participated in the joint drafting process, and is supportive of those principles. Meanwhile, we hope the principles will receive positive responses from recipient countries of SWF investment. And we hope recipient countries would treat SWFs in a fair, just and non-discriminative way, and provide a good investment environment for investors to regain confidence. SWFs suffered losses in this crisis. Some are in a very difficult situation and trying to re-balance themselves; others have adjusted investment strategies or charters and turned to invest domestically. As the sole Chinese SWF, CIC will adhere to its established mission, continue to make prudent investment and conduct commercial operations. An important reason for our adherence is that China has adequate foreign exchange reserves, and we do not see the need to change our investment purpose and strategy. The author is chairman of the CIC. The article is an abridged version of a speech the author made at the Second Annual Roundtable of Sovereign Asset and Reserve Managers in Washington on Feb 18 (China Daily 04/02/2009 page8) |
