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How China can weather the economic crisis and raise confidence
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China should focus on the following measures to weather the global financial crisis.

First, the government should increase fiscal expenditure.

In the present damaged price system, only "the visible hand" can rectify distorted price signals caused by the crisis, thus preventing the economy from falling into recession.

Then, once reasonable price signals are restored, the government should quickly reintroduce "the invisible hand," which is indispensable in making the market more efficient.

China has embraced an active fiscal policy and industrial restructuring strategy.

This shows not only that finance crisis is so destructive that it can never be resisted without these powerful measures, but also that China, as a leader of developing countries, is ready to tackle the crisis hand in hand with developed countries.

Second, the government should skillfully implement foreign exchange policy and trade policy.

Since a stable growth in trade volume is favorable to economic revival, China makes every effort to strengthen foreign exchange management, to bring down the tariff rate and to raise export rebates to enhance the competitiveness of its export industry.

It is well-known that in this great financial crisis the American and European economies are seriously damaged not only in their financial industry but also in the real economy. This, at least, presents an opportunity to China by trade.

The opportunity stems from the radical transformation in the American mass consuming structure, shifting from goods with high added value to those with good quality but low price.

China, a country with labor-intensive industry, is quite competitive in producing those inexpensive goods.

However, we cannot deny that it is becoming harder for China to maintain a favorable balance with Europe and the US, for both parties will urge China to equally open its domestic market.

Therefore, the domestic sales of merchandise with high added value are more likely to be monopolized by more competitive foreign brands, thus increasing China's trade deficit and leading to the situation of low growth rate with high unemployment.

Third, the Chinese government should adopt an expansionary monetary policy and a tax relief policy.

The monetary policy, such as decreasing interest rates and lowering the deposit-reserve ratio, helps increase market liquidity and reduce financing cost.

The tax relief policy can improve profits and cut costs. In fact, this is more effective than monetary policy in stimulating private investment and consumption.

Last but not least, the government should influence public expectations by showing optimism in China's prospects and full confidence in defeating the crisis.

According to Lucas' Theory of Rational Expectation, people tend to manage their investment and consumption according to their expectations for the future.

(The author is professor of finance and executive vice dean of the School of Economics at Fudan University. Shanghai Daily condensed his article. The views are his own. He can be reached at sunlijian@fudan.edu.cn.)

(Shanghai Daily March 30, 2009)

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