The collapse of 'China collapse' theory

By Wang Wen
0 Comment(s)Print E-mail, August 28, 2014
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 [By Zhai Haijun/]

 [By Zhai Haijun/]

Shadow banking poses another risk to China's economy, as demonstrated by the "money shortage" caused by dysfunctional relations between the financial system and the real economy. Shadow banking accounts for about one quarter of the country's outstanding loans, and the proportion of shadow banking credits and loans increased from 20 percent of the total credits and loans in 2008 to 40 percent in June 2013. Widely-circulated rumors allege that shadow banking will become China's Lehman Brothers when people start withdrawing their money.

The intricacy of international economies has also exacerbated the downward trend in China's economy. After the outbreak of the global financial crisis, many developed countries and regions adopted quantitative easing (QE) policies which caused competition for currency devaluation and mass fluctuation in international exchange rates.

At that time, a large amount of hot money flowed into Chinese market, particularly into the real estate market, raising asset prices and increasing fluidity risks. However, the United States' recent retreat from QE has caused the outflow of the capital from China, which has also increased national financial risks.

In the meantime, the United States has been mapping out international trade systems which exclude China. The Trans-Pacific Partnership (TPP) intends to constrain China with economic measures, while the Transatlantic Trade and Investment Partnership (TTIP), regarded as the economic equivalent of NATO, enhances the United States' leading role by strengthening cooperation with European countries.

The effects of these two pacts on international trading will surely impact China's export economy. The trade policies adopted by the United States have escalated competition and conflict in Sino-U.S. trade relations. Problems between the two countries over the exchange rate of the Yuan and cyber security have exerted great pressure on China's economic growth.

Counteracting the downward pressure of China's economy

Reform, which is a driving force behind sustainable economic growth in the long term, can help reap greater dividends from China's development. The central government stressed deepening comprehensive reform of economic institutions in the Central Economic Working Conference in 2012, outlining an overall plan and specifying methods and timetables.

In 2013, the country carried out financial reforms focused on interest rates and capital market. It also plans to accelerate the reform of fiscal and tax policies. Those measures will improve capital supply by marketizing factor prices distorted by unreasonable interest and exchange rates, pushing forward the development of capital markets, opening financial accounts and expanding the internationalization of Yuan. Meanwhile, the budget system is expected to be improved through fiscal and tax reform, so that financial power of the government and its power to perform their responsibilities can become independent of each other.

Innovation is another key element behind strategic economic restructuring and the remodeling of economic development. Science and technology play increasingly important roles in promoting economic and social development throughout the world. As Chinese President Xi Jinping noted at the 9th Plenary Study Conference of the Political Bureau of the Central Committee of the Communist Party of China (CPC), China needs to devote more financial resources to the innovation sector in order to build talent pools and support innovative industries, thereby enhancing the competitiveness and importance of China's economy in the global industrial chain.

New Urbanization also provides China with an opportunity to transfer 300 million rural people to cities. This process promises to unleash big economic potential in the form of huge domestic demand, which is regarded the engine of the economic development.

Finally, opening up policies will definitely stimulate economic growth and development. China's opening up strategies have generally taken three forms: "opening up driven by policies," "institutional opening up," and the current "overall constructive open economy." The Free Trade Zone (FTZ) marks the last stage of overall opening up.

FTZs, which were proposed in 2012, are part of a plan to balance bilateral, multilateral, regional and subregional cooperation. The establishment of the Shanghai FTZ is the first concrete step. This FTZ, which has adopting the Negative List management mode, increases investment access, trade in services and financial programs.

Further plans to develop FTZs in the northwestern, southeastern, and central China will reconfigure the national economic layout to better face the challenges presented by the TTP and TTIP.

So despite the proliferation of collapse theories, the Chinese economy will embrace another era of reinvigoration rather than fall into an abyss as the country prepares for sustained high-quality long-terms growth. China's economy shall rise again, just like the legendary rebirth of a phoenix.

The writer is Vice Dean of the Chongyang Institute for Financial Studies, Renmin University of China.

The article was translated by Zhang Lulu and Wu Jin. Its original version was published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of

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