China’s Economy Has Three Bodyguards

Many experts believe that China’s economy will take the lead in getting rid of the financial crisis. According to them, three factors will play an important role in guaranteeing the economic growth rate.

Sorry, I am late because of the traffic jam. But I am glad that the busyness of Shanghai makes me see the signal of recovering economy,” said Hans Timmer, Head of the World Bank’s Development Prospects Group when he was present in the Special Seminar for Financial Crisis and Reform to International Currency System held by the Asia-Pacific Finance and Development Center, the Ministry of Finance and the Shanghai National Accounting Institute. Timmer also pointed out that China will be one of the first countries to get rid of the financial crisis. To reach this goal, three factors are necessary, which are the increase in productivity, balance of macro economy and stable currency environment.

Great Potential in China’s Economy

Timmer is quite confident in China’s economic development in the future. “China’s economic growth is still stable and fast. I don’t think that the global financial crisis can put an abrupt end to this trend. There is still great potential in China’s economy,” said he.

Timmer pointed out that three conditions must be satisfied if China wants to keep its economic growth rate. Firstly, the productivity, which is the main driving force of the economic growth, should be continuously improved. In his opinion, China’s economic development doesn’t simply depend on the exports. Instead, it depends on the potential productivity which is being continuously released since the reform and opening up. Meanwhile, China is always good at making use of any elements good for improving the productivity.

Secondly, China must keep its macro economic balance at a certain level; namely, there can not be a large gap between gross national savings and gross national investments. Timmer said that it is impossible for the economy to make unstopped development in an unbalanced situation. This problem once arose in Japan and now it began to show up in China. The unbalanced economic development of China is not derived from the global unbalance. Therefore, it is necessary to find a way to lower the growth rate of savings while increasing the investment proportion. Timmer suggested that the Chinese government should focus on solving the problems of medical issuance and aged support for the ordinary people and finding some ways to stimulate their consumption will.

Thirdly, China needs a stable currency environment. Timmer believed that the surplus fluidity can bring about the bubble in asset price. The government has to prevent too much capital from entering into the property market and stock market, in order to avoid the problems of high inflation which China has experienced.

Mansoor Dailami, International Financial Director of the World Bank’s Development Prospects Group, hoped that a bubble will not come out with the development of China’s economy, because this may be a problem hard to be solved in a long period. “We hope that China can maintain its annual economic growth rate between 8% and 9% and can avoid the shock from the financial market as much as possible. The financial shock can cause troubles in the macro economic management, as well as negative influence upon the foreign direct investors’ confidence in China’s economy,” said Dailami.

Fragile Structure in Recovering Period

Though being glad about the signal of recovery of China’s economy, Timmer gave out a warning that people should not be too optimistic in the prospect of China’s economy. He said that many countries’ governments took many strong policies, especially some monetary policies, to stabilize the financial market at first, which is helpful to keep the whole economy stable. In that way, the entity economy takes on a recovering trend. In spite of this, the middle-term forecast about the global economy is still very fragile. The different industries and regions are still confronted with various kinds of stresses.

“We can see that many countries’ governments have seen lower financial incomes and increasing financial expenditures, which has triggered the worries of people about the coming-out of the crisis in the balance between international incomes and expenditures. Though the economic rebound can be seen at this time, it can not offset the negative influence brought about by the financial crisis started from September 2009,” said Timmer.

Timmer said that the enterprises in developing countries have to face the stress of re-financing, which is main reason to the fragile economic structure during the recovering period. Timmer estimated that the developing countries’ extraneous financing amount is 1.1 trillion US dollars, but the amount of capital flowing into those countries is only 360 billion US dollars. The gap between the demand and the actually-needed amount should be filled up with their foreign exchange reserves. IMF can provide the developing countries with 500 billion US dollars, far from satisfying their demand.

Timmer thought that the global financial crisis can only be eliminated when the global policy coordination is introduced. It has two aims: the first one is to prevent the new crisis from happening through coordinations in the policies. Now the new economic or financial crisis is still likely to happen, especially in Europe. The second one is to realize the balance together with the recovery of world economy. Timmer also forecasted that the world economic growth rate is respectively -2.9% in 2009, 2% in 2010 and 3.2% in 2011.

Worries about Asset Bubble

Many countries’ central banks took loose monetary policies resulting in the new surplus of fluidity. Timmer expressed his worries about this: “Before the consumers resume their confidence, such a low financing cost can inspire people to actively borrow money to invest in stock and property markets. Therefore, the central banks of different countries should pay attention to and be alert on whether the fluidity is reflected in the bubble of asset price.”

Timmer also worried about that the large fluidity released by the US Federal Reserve will affect the normal operation of the security market by increasing the stress of raising interest rate. Once the interest rate is raised, the financial deficit of the US government may be enlarging, which is not good for economic recovery. In his opinion, the loose monetary policy did control the crisis and played a positive role in economic recovery in a short time. But from the long-term view, the central banks will have to face great stress if the loose monetary policy is still effective. A big problem will arise if it is not fast enough to reduce the fluidity.

In conclusion, Timmer believed that the current easy fluidity will not bring about the inflation with the traditional meaning in a short term. The surplus production capacity can be consumed by several years’ high economic growth rate. Therefore, the prices of ordinary commodities and services will not go up. Though some bulk commodities’ prices have already been increased, the worldwide inflation will not happen in a certain period.