Coping with the Crisis Will Require a Full Understanding of the Relationship between the Government and the Market

From: English Edition of Qiushi Journal Updated: 2011-09-19 19:06
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    The financial crisis that is sweeping the whole world is dealing a heavy blow to the global economy. The financial crisis is testing the ability of all the world’s governments to manage their economies and the wisdom of all humankind. Through consideration of the causes of the crisis and possible countermeasures for resolving the crisis we are once again reminded of the relationship between the government and the market. This realization presents a rare opportunity for us to gain a better understanding of this relationship in both theory and actual operation and will help ensure long-term, rapid and stable development of the national economy.

    Coping with the Crisis Will Require Improving the Government's Macroeconomic Regulatory Functions

    China has established the basic framework for a socialist market economic system. The four main pillars of this system are the independent entities operating in the market, an orderly open market system that allows fair competition, a macroeconomic regulatory system that combines planning, fiscal and taxation means and banking operations in a coordinated manner and a sound legal system. This system ensures that full play is given to the basic role of the market in distributing resources under macroeconomic regulation of the state. In addition to making use of the role of market forces as in developed market economies, the system also features the macroeconomic regulatory function of the government and legal guarantees. The decision to set up this system was a scientific policy decision made in consideration of China’s conditions using the experience of other countries. Time has shown that implementation of this system will make it possible to encourage all parties to participate in economic development. This is because we have constantly improved the system of macroeconomic regulation so that it has a mutually balancing and mutually restraining function. This system ensures a rough balance between demand and supply mainly through monetary policy, promotes continuous improvement in the economic structure through fiscal and taxation policies, and provides an effective guarantee for sustained, stable and rapid economic growth through the integrated force of the various regulatory tools by making long-term and medium-term development planning and annual objectives and policies for macroeconomic regulation. 

    The international financial crisis is having a serious impact on the Chinese economy. One obvious sign is a big drop in China’s exports caused by shrinking market demand in the United States and other developed countries. A drop in external demand is the greatest difficulty faced by China in efforts to meet the target of around 8% for annual economic growth. Exports in 2008 accounted for 33.5% of China’s GDP, equivalent to 92.8% of the total volume of domestic retail sales of consumer goods. The big drop in exports can not be offset by domestic consumption. It must be made up mainly through expanded investment. To this end, the government must make decisive action plans to expand domestic demand and adjust the level of investment as needed to expand domestic demand in line with economic activity to release China’s potential for economic growth. Taking advantage of the pressure resulting from shrinking external demand, we have been issuing national bonds and carrying out more structural adjustment to promote change in the pattern of economic development. The change is designed to reduce the excessive reliance on investment and exports to put more emphasis on domestic consumption, investment and exports, to reduce reliance on consumption of energy resources to mainly rely on advances in technology and to improve management and the quality of the country’s workforce, gradually increase investment in the development of the service industry, and in education, medical care and social security programs, and to expand the role of consumption in promoting economic growth. If we can successfully carry out this change in the pattern of economic development by taking advantage of the pressure presented by shrinking export trade, we will truly be able to turn this crisis into an opportunity for development.

    Adopting a proactive fiscal policy is a fundamental measure for coping with the crisis. The key is to figure out how to take advantage of the role of government spending in driving non-government investment, bank lending, consumer spending and exports so that government spending creates a ripple effect throughout the economy. Therefore, government funds should be used mainly to provide low-interest loans, guarantee credit, subsidize capital funds and grant tax reductions and exemptions in order to stimulate more non-government spending and investment from bank lending, using only a limited amount of government funds to expand the effect of the policy of expanding domestic demand. 

    The moderately easy monetary policy adopted by the government is playing a decisive role in coping with the impact of the crisis. China’s banking industry, which has sustained few losses in the global financial crisis, has ample liquidity. Moreover, conditions in China will allow an increase in lending, which will also provide the objective requirements for improving management of the banking industry. We need to focus on increasing lending to small and medium-sized enterprises and to rural areas to address the long-standing problems faced by small and medium-sized enterprises and farmers in trying to get loans. In addition to reducing bank interest rates and encouraging banks to increase lending, we need to strengthen banking administration to avoid the banks having new bad debts, strive to reduce the proportion of non-performing bank assets and give full play to the role of banks in ensuring rational distribution of loan funds. 

    The government, enterprises and consumers need to act in concert and strengthen their confidence in economic growth to overcome the impact of the crisis. The Chinese government has worked out plans to reinvigorate ten industries and a series of policies to encourage upgrading of industries. Enterprises should actively respond to the call of the government and make good use of the government policies to stimulate industry so that enterprises will have a beneficial effect on the government and vice-versa. Consumer confidence in the Chinese economy needs to be strengthened, and consumers need to be encouraged to have rational expectations and appropriately increase consumption. The government, enterprises and consumers need to reach a common understanding in order for China to shake off the impact of the crisis as soon as possible. 

    Shaking off the Impact of the Crisis Will Ultimately Require Making Use of the Market

    In coping with the financial crisis, we will undoubtedly find it necessary to give more play to the function of the government in organization and management. But the problem is with the market and we will ultimately have to use the market to resolve it. There are a number of reasons for this. First, the financial power of the government is limited, and only through the market it is possible for the policies of the government to produce a ripple effect and attain the objectives set by the policies. Second, the financial crisis originated from errors in the market and we must therefore identify the links in market operations causing the problems and adopt policy measures to address the problem. As a country affected by the crisis, China should draw lessons from it and establish a new structure and new systems to avoid repeating the same errors. Third, we need to create new areas of demand to resolve the impact of the crisis and form new growth points for investment and consumer activity, and this will require the participation of great numbers of enterprises and consumers. Therefore, we need to strengthen the role of the government while working to lessen the impact of the crisis. This move is not designed to replace the role of the market by the government; moreover, it does not signal a return to the old model of the traditional planned economy. It is designed to correct the unhealthy elements of market operation, improve order in the market economy, ban actions in the market that are harmful to the public and return the market economy to a correct development path. 

    To reduce the impact of the crisis as soon as possible, we need to focus on strengthening the role of the market in a number of areas. We need to expand domestic demand to offset the impact on the economy of shrinking export volumes. The objective of an annual economic growth rate of 8% is based on expectations of an increase in exports in the whole year in step with the growth in GDP. Judging from demand in the international market, it is likely that exports in 2009 will decrease. Based on the premise that exports might experience zero growth, a decrease of 5% or a decrease of 10%, we will need to increase government spending by 1.1 trillion yuan, 1.5 trillion yuan or 1.8 trillion yuan in order to ensure 8% growth in GDP. The scale of non-government spending should thereby reach 21.8 trillion yuan, an increase of 26.7%, 22.2 trillion yuan, an increase of 28.6%, or 22.5 trillion yuan, an increase of 30.5%. In view of this situation, we need to prepare for the worst, i.e. a decrease of 10% in export volume. We need to use all means possible to contain sharply decreasing volume of exports, adopt comprehensive countermeasures to stimulate exports, and stabilize and intensify the role of foreign demand in promoting economic growth. We need to work to increase exports of labor-intensive products, expand exports of products with Chinese-owned brand names and encourage exports of services. We need to increase refunding of export duties and improve the export tax rebate sharing mechanism. We need to increase support for credit and insurance. We need to settle more accounts in international trade using the RMB yuan. Overseas importers of Chinese commodities should be granted loans in RMB yuan and overseas investment and contracting for projects should be expanded to create greater export demand. In response to the moves of the Federal Reserve of the United States to purchase T-bonds to begin depreciating the U.S. dollar, we will reform the mechanism for setting the exchange rate for the yuan, ensure basic stability of the actual effective RMB exchange rate and help enterprises cope with the risks of exchange rate adjustments. Customs clearance needs to be streamlined. We need to take an active part in bilateral and multilateral economic and trade activities, take effective measures to cope with trade protectionism and encourage enterprises to develop international operations. While continuing efforts to open up traditional markets, enterprises should also focus their efforts on emerging markets such as those in Africa and Latin America to diversify trade risks and expand export volumes by diversifying their markets. 

    We need to stimulate the domestic market to increase consumer spending. The rate of consumer spending for Chinese citizens was 35.4% in 2007, 17 percentage points below the record level of 1985. This is about 30 percentage points below the rate of developed countries. The excessively low rate of consumer spending has adversely affected the national economy. The main task for macroeconomic regulation at present should be to raise the consumer spending rate, reduce the rate of investment and strengthen the role of consumer spending in promoting economic growth. An important reason for the low rate of consumer spending is the continuous drop in personal incomes as a proportion of GDP. The ratio of personal income to the GDP was 44.9% in 2007, a drop of 11.3 percentage points from the record high of 1985. We need to adopt a variety of measures over the next three years or so in an effort to raise the proportion of personal income in the GDP by ten percentage points to bring it up to 55% and the rate of consumer spending by 15 percentage points to bring it up to 50%, approaching the 56% and 52% of 1985 record highs since China first instituted the reform and opening up policy. The realization of this target would mean that every year more than 5 trillion yuan would be shifted from investment and exports to consumer spending on commodities, raising the level of consumer spending by a big margin. This would be a true improvement in the pattern of development through an expansion of domestic demand, especially consumer spending.

    Stimulating non-government investment is a key link in increasing investment. The continuous deepening of the reform of the investment structure in China has resulted in an investment pattern in which enterprises are the main investors. Independent enterprise investment now accounts for over 90% of all fixed asset investment in China. Enterprise self-raised funds account for over 70% of all the investment funds from different sources in the whole country. With decreasing of external demand, promoting non-government investment is a key link in efforts to realize the targets for macroeconomic regulation in 2009. In order to encourage enterprises to make investments, we need to create an excellent policy environment for them. First of all, both government and non-government enterprises should be treated the same with respect to examination and approval of projects, land use policy, collection of taxes and fees, and standards required to operate. Unreasonable restrictions on non-government investment in certain monopoly industries should be rescinded. Second, we should give policy support to enterprises, especially for small and medium-sized enterprises, in financing through the issue of bonds, granting guarantees for loans, and providing low-interest loans, to strongly encourage them to start new businesses. We should lower the minimum required capital for enterprise registration to support the development of small enterprises. Third, we need to encourage labor-intensive and energy-intensive industries in the coastal regions of the Chinese mainland to shift operations to the interior regions of the mainland and concentrate resources to develop technology-, knowledge- and capital-intensive industries. Fourth, we need to accelerate the process of urbanization, encourage farmers who have fixed incomes in cities to settle down there and provide housing for workers from rural areas. Fifth, we need to improve the investment environment, expand the scale of utilization of foreign capital and stimulate investment on the part of domestic enterprises through foreign investment. 


    Guilin Betterall Household Articles Co., Ltd., located in Lipu County, Guangxi Zhuang Autonomous Region, holds a 60% share of the Chinese market for clothes hangers and exports large volumes of the company’s products to over a dozen countries and regions. The company's performance has defied the effects of the current financial crisis.           

    The real estate market, the automobile market and the stock market are the main engines driving China’s economic development at the present stage. In order to ensure that the real estate market continues to thrive, we must satisfy the housing requirements of the people, focusing on people with medium and low incomes, control urban housing prices at a level that most people can afford, focusing on increasing the land supply for medium-sized and small apartments and low-income housing, lift controls to stimulate the secondhand housing market, expand the housing leasing market and unify the urban and rural housing markets in line with the requirement to give overall consideration to the needs of urban and rural development. We need to encourage expansion of automobile sales, focusing on instituting a policy on expanding credit for automobile purchase and reducing the cost of using automobiles, and strive to improve the environment for automobile use to strongly stimulate automobile sales. In addition, we need to encourage purchases of electrically powered automobiles, hybrid automobiles and cars with medium and low exhaust levels to save energy and protect the environment. We need to promote steady and healthy development of the capital market, focusing on maintaining stable and healthy development of the stock market. On the one hand, we need to strengthen basic system improvement efforts, intensify government regulation of the stock market and promote standardization in the development of the stock market. On the other hand, we need to make a distinction between the regulation of total supply and demand in the stock market and administrative interference, and improve macroeconomic regulation of the stock market to avoid violent ups and downs of the stock market. In summary, we need to work to make the real estate industry and automobile industry into important industries that drive development and consistent prosperity of the national economy for some time to come by ensuring the stability and thriving of the capital markets so that they can support the continued flourishing growth of the real estate and automobile markets. 

Note: Zheng Xinli is the Deputy Director of the Committee for Economic Affairs of the National Committee of the Chinese People’s Political Consultative Conference
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