China vs Global Financial Crisis

by

George Zhibin Gu

author of several new books: 1. China and new world order, China's globa reach, and Made in China.

taken from www. financialsense.com

Today, the world economy and the marketplace are deeply stuck in the mud of a far-reaching recession. What is China's real exposure to the global financial crisis? Can this emerging nation sustain the crisis?

The answer: on one hand, China is experiencing vast pains; on the other, China can still manage the problems arising from the crisis. In short, this increasingly globalized China must take the same boat along with the rest of the world community.

China’s Vast International Dimensions

China's real exposure to the global financial crisis is huge and has many dimensions. First, the country's growth in this era, especially in the past two decades, has depended heavily on international trade, which accounted for US.56 trillion as of 2008, as well as foreign direct investment, accounting to over 0 billion.

Second, China's foreign reserves stand at about .95 trillion, with more than half invested in US government and agency bonds. Third, over 25 million Chinese employees now work for overseas companies inside China.

So, altogether, China's economic and political health is directly tied to the fortunes of global markets and world development. Any negative development in the global markets and economy must have adverse consequences for China. At the same time, slow growth inside the nation could be negative to the world economy.

This new crisis is like no other, for the world is highly inter-connected like never before. What then is the next stage of global development? What is the best-case scenario and the worst-case scenario?

There is no short-term solution. The best-case scenario is that the US-centered global financial crisis will be stabilized within the next 18 months. People's confidence will pick up and a more rational resolution of problems will arise. In particular, the employment picture can change for the better. Thereafter, the world's governments could focus on reform of the global financial system so that it become more accountable and therefore more stable - hopefully. But people's entrepreneurship is the ultimate solution to getting out of the mud of the global financial crisis, or any other crisis.

But things could go from bad to worse. The worst-case scenario is this: the global financial crisis drags on for many years. What is more, economic crisis could lead to geopolitical-economic conflicts. For example, it could promote nationalist protectionist trade barriers and conflicts. Also, if the dollar goes into free fall, or if the US government prints too many dollars as a way to deal with its astronomical debts and trade deficits, it would lead to an unstable period for the global economy and political life. This aspect requires new attention.

China’s pains

There is no winner out of this recession. China's political and economic health is already deeply affected.

For China, the biggest issue is with the poor unemployment situation. Not to mention other things, shrinking international trade is causing vast pain in this part of the world. Indeed, in the first quarter of 2009, China's international trade dropped 24.9% over a year earlier. This slowing international trade is to continue for the immediate future. So far, countless small- and mid-sized trading and manufacturing companies in coastal regions have gone under. Over 20 million rural migrant workers have lost their jobs. What is more, some 6 million new college graduates have enormous trouble in securing employment. Such troubles could lead to dramatically adverse consequences.

The most fundamental issue related to sustained economic development inside China is to move decisively toward a law-based market economy, free from the deadly meddling of an unlimited bureaucratic power. The most basic requirement for this end is to have a firm separation of government from the business sphere. In such a way, the government can truly function like a government and the business entities can truly develop to become modern business organizations with a right set of owners, legal protection and governance. All said, turning the political body into a true modern service body must be carried out, the sooner the better. Unfortunately, these basic issues have yet to be resolved, along with the deepening of reform.

What is more unfortunate, this ongoing global financial crisis has meant a continuing delay in true and basic economic reform. But without fundamental economic reform, sustained and rational development will be filled with crisis, which is built into the old economic and political systems.

This aspect of the basic issues is little understood by the outside world, but it is fundamental for the healthy economic development of China in the long run. Simply put, all the positive economic development in the past three decades must be installed in a law-based modern institutional and legal system. That is something China has no way of avoiding if its sustained development is to be maintained.

Naturally, slow growth and lack of deepening reform in the Chinese economy and political system could have a considerable impact on the wider world, for China's economy and development are already an integral part of the world economic system.

All of us live in the same boat, something increasingly recognized thanks to the ongoing global financial crisis. As far as China is concerned, today's economic situation, regardless of how ugly it has become, is still manageable, for China has made vast economic progress over the past 30 years.

Above all, China has become increasingly integrated into world development and global markets. In this regard, resolving the deep-seated problems within China will serve as a significant contribution to the world. At the same time, China's sustained progress will positively affect global development, and vice-versa. Nonetheless, failure to change the body of Chinese government will cause more harm, infinitely more, than the adverse impacts of the global financial crisis.

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For complete transcript, see

http://www.financialsense.com/fsu/editorials/gu/2009/0501.html