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Crisis Focus
Special
UPDATED: January 11, 2009 NO. 3 JAN. 15, 2009
Can the Economy Be Saved?
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With its export sector stuck in a freefall and a slowdown in the real economy looming, the Chinese Government has spared no rescue efforts. A 4-trillion-yuan ($586-billion) spending plan, repeated interest rate cuts and looser regulations for the real estate sector are just three of the actions the

government has taken in the past months to boost the economy. But which one will be the most helpful? How long will it take for the economy to rebound? Li Yining, a renowned economist in the country, discussed these issues in an interview with the Money Weekly. Edited excerpts follow.

Historic reasons

The financial contagion originated in the United States went global when it started to sap market confidence. Now, the Wall Street-generated gloom has spread all over the world. Even China, whose financial system was relatively insulated, is no exception.

In addition to the global financial turmoil, China's economic slowdown has some other historic reasons behind it. First, the year 2008 was destined to mark a turning point in the economy, which had chugged along at double-digit growth rates for years. Such a torrid pace became unsustainable when global commodity supplies tightened. Second, the manufacturing boom overshadowed the importance of industrial innovation, which should have been a top priority. The outbreak of the industrial bottlenecks came as a blow to the economy.

How to help?

In my opinion, tax breaks, among several other options, will be the most instrumental in counterbalancing the growing economic slack. They could effectively alleviate the burdens of enterprises and help them pull through the difficulties.

The government spending spree is also a boon for holding up growth and supporting employment. A group of industries such as cement and steel will benefit from the infrastructure projects. Besides this, the workforces employed by the projects will surely add to consumption. But we should guarantee the quality of economic growth and guard against blind investments.

Personally, I do not think it makes any sense to precipitate a free-floating exchange rate for the yuan, for which China is not ready yet. The collapse of Thailand in the 1997 Asian financial crisis can teach us some lessons. The free-market exchange rate of Thailand's currency, the baht, enabled a massive pullout of foreign capital, hitting the economy hard. As a result, China should still maintain control over foreign exchange rates before the economy strengthens enough.

Recovery on the way

The top nagging headache of policy makers now must be the reeling exporters. Their downturn leaked into an array of upstream suppliers of raw materials and also eroded several related service industries. Their massive closures have also cast a pall over the employment market.

Fortunately, China's financial system has emerged unscathed due to less exposure to toxic subprime mortgages. The unprecedented stimulation efforts are expected to take effect as of this February, while uncertainties clouding the economy will remain.

From a global perspective, the ailments of the U.S. economy have yet to fully reveal themselves. The financial bust and the automakers' woes may be just the tip of the iceberg. No one knows what could be wrong with the manufacturing industry. After all, whether the U.S. economy will recover soon largely depends on how aggressive the government bailout can be. It's now believed among foreign economists that the U.S. economy will not start to revive until the latter half of 2009, six months or one year earlier than European countries.



 
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