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Prepare for the worst

(China Daily)
Updated: 2009-03-04 07:46

The nosedive that US stocks have taken should end the debate among some Chinese economists over the possibility of a second wave of global financial crisis. That debate may be theoretical, but for Chinese policymakers who have vowed to do whatever it takes to fight the crisis, the latest shock only marks the beginning of a long battle. To win that battle by turning domestic consumption into a major growth engine, they have to come up with stronger actions.

US insurer American International Group posted a staggering $62 billion loss in the fourth quarter last year, the biggest in US corporate history, and accepted an expanded bailout package from the government. That added fuel to investors' fears (read fire) over the stability of the financial system and sent US stocks hurtling down to 1997 levels on Monday.

Though the bleak global economic scenario has already made almost all governments across the world realize that the worst is not yet over, what is happening in the United States, where the crisis started, indicates that things could get worse and last longer than actually feared.

If that is the case, Chinese policymakers should not only expand the stimulus package to maintain steady economic growth, but also deepen structural reforms to raise the purchasing power of domestic consumers. The two moves are essential for a sustained economic growth in the long run.

After global demand began plunging last year, hitting Chinese exporters where it hurt the most, it has become clear that China can no longer rely heavily on fast trade growth to maintain a steady economy.

With the global financial crisis and economic recession forcing major trade-deficit countries such as the US to save more, China needs to encourage domestic consumers to increase their spending in order to help balance its economic growth.

The relatively stable and healthy financial sector of China has insulated the economy to a large extent against the global financial crisis. But the challenge will become bigger once the deepening global crisis takes its toll on China's real economy.

Assuming that global economic growth would suffer for some more time to come - and all indications point toward such a reality - Chinese policymakers would do better to prepare for a least-favorable scenario as soon as possible. That solution will definitely include more substantial efforts to remove the bridles that have long discouraged Chinese consumers from loosening their purse strings.

Keeping a sober mind during these times of economic gloom does not necessarily mean a person or government is being pessimistic. Instead, preparing for the worst may enable us to get the best out of the global financial crisis.

(China Daily 03/04/2009 page8)