Lessons come in handy, but this challenge is bigger

By You Nuo (China Daily)
Updated: 2008-11-11 09:17

China has seen a financial crisis before: the Asian financial turmoil of 1997-98. That crisis, triggered by the collapse of the Thai baht, got really bad in the fall of 1998 when rumors spread that the yuan could be devalued and international speculators attacked the Hong Kong dollar.

But China pulled through the crisis mainly by increasing domestic spending. Many of the high-quality roads in and between Chinese cities and much of its Internet and mobile communication networks were built or were started at that time.

That experience has proved useful now that the global financial crisis threatens to cause an economic recession. The difference this time is that the crisis is global, not regional, and hence the challenge is more serious demanding a more focused attention from the government.

The present turmoil has its origin in the subprime crisis in the US, perhaps the worst hit country by the financial crisis. That has made a lot of difference to China because people in the US are the top consumers of China-made products.

Official figures show about 240,000 people lost their job in the US in October. If they were earning an average of $10 a day, it would mean a direct loss of purchasing power of at least $60 million a month. Many others have lost their jobs, money or homes before them, and many more are likely to do so over the next weeks, if not months.

For manufacturers based in China, irrespective of where they come from, the gloomy market figures from across the Pacific and Europe unmistakably signal a fall in business orders.

The US government has approved a $700-billion economic bailout package, and many other countries have announced similar, if smaller, stimulus plans. But uncertainties remain over the next US administration's move and how the rest of the world would work together, though China is already committed to helping the international community overcome the crisis.

Compared with the Asian financial turmoil (when the Americans were spending as usual), there seems to be less hope of a quick global recovery. That means the role the international market could play to sustain China's growth is even more limited - and not just for now, but probably for the whole next year, if not longer.

But China cannot afford to wait. It must focus whole-heartedly on the domestic market and people at home to generate the growth it needs. The 10-point financial stimulus package announced on Sunday reflects the government's realistic approach. Though little is mentioned about exports, companies supplying goods and services abroad will undoubtedly receive greater government incentives.

The aim of the package, however, is domestic development - improving public infrastructure, including railways, roads, airports and power grids, and helping natural disaster victims such as those in Sichuan, Gansu and Shaanxi who were hit by the killer quake on May 12.

The package deals with a factor that has never been expressed so straightforwardly at the policy level - spending projects have been designed to merge with various social programs. They include improvement of low-income people's housing and their living conditions and protecting the environment by reducing pollution and conserving forests.

Between the Asian financial crisis and now, the government has launched a number of important social programs, especially in rural areas, such as wider coverage of rural medical insurance and better protection of land rights. These programs can help the country raise consumer demand and retail sales both in the long and short run.

The stimulus package may be a shot in the arm for the national economy, but it has another purpose: to stabilize the international market. The reason: a stable international market means better economic growth for the country.