Can China Avoid an Economic Crisis?

No.43
February 1999
Research Fellow Long Ke

1. Increasing domestic demand is the key to macroeconomic growth. To this end, China's Ministry of Finance is engaging in the unbridled issuing of government bonds and front-loading corporate investment. Further, the MOF is also lowering interest rates as a method of relaxing monetary policy. At the same time, in order to adjust the structure of the Chinese economy, China is beginning to engage in the earnest reform of state-owned enterprise. The restructuring and downsizing of state-owned enterprises is triggering a massive number of layoffs, and thus is becoming a cause of social instability. For China to continue the reformation of state-owned enterprises, it must develop a labor-intensive service industry.
2. Financial reform is an important turning point for the Chinese economy. Though those financial institutions with lending portfolios that cannot be improved must be readjusted, increasing funding by foreign banks during this process courts the risk of the financial system sinking into chaos. Additionally, though state-owned commercial banks are currently undergoing assessment, it is clear that they are very bloated. Indeed, there are many difficult issues facing financial reform, but reforms based on market mechanisms must nonetheless be accomplished with haste.
3. Supporting a steady reminbi yuan exchange rate has played a major role in the recovery of the Asian economy, but in the long term it will result in stagnating exports and distortions in the internal and external price structure. That is to say, it would have been beneficial if China had devalued the reminbi yuan in 1998, but that time has come and gone. The most important issue in China's political agenda for 1999 is to maintain stable social conditions. In the future, however, China's policies for promoting exports without devaluing the yuan will attract notice.
4. There are many uncertainties facing China's economy following reform and liberalization, but-barring substantial policy measure mistakes in 1999-while the potential for a return to high-level economic growth is low, the continuation of mid-level economic growth can be expected. Even while aiming for the realization of a mid-level growth scenario, China must not decelerate the pursuance of state-owned enterprise and financial reform.

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