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The demise of China's transition economy is greatly exaggerated

By Yeomin Yoon ( Updated: 2016-02-23 17:32

The demise of China's transition economy is greatly exaggerated

Rail tracks are laid on a route in Nantong, Jiangsu province. [Photo provided to]

Editor's note: Observing the recent turmoil in the currency market involving the renminbi and the current volatility in China's stock markets, many Western economists or scholars seem to have joined the chorus predicting a "China breakdown", "the end of the Chinese model", or even "the collapse of China". Thus I sent an email to professor Yeomin Yoon of finance and international business at Seton Hall University, New Jersey to ask him to comment. The following are excerpts of his answer.

When some American newspapers reported on his death, Mark Twain, one of the smartest men America ever produced, quipped: "The reports of my death have been greatly exaggerated." I regard such views on China as you cited above in a similar vein: "The reports of the demise of China's economy is greatly exaggerated."

China's economy, after achieving miraculously high growth rates for more than three decades, is undergoing significant transition. China is attempting a shift away from an export-driven and investment-led economy to a more balanced, consumption-based and service sector-oriented one.

In order to achieve these goals and a Xiaokang ("moderately affluent") society by 2020, policymakers have set out an extensive reform agenda. This includes establishment of proper financial infrastructure, state-owned enterprise, fiscal and rural land reform.

In an economy as big as China's -- remember that China's economic size, if measured in terms of purchasing power parity, exceeded that of the US in 2014 – such widespread and ambitious transition naturally brings significant uncertainties and cannot be expected to be as smooth as Chinese silk. One should naturally expect lots of hiccups. Please understand that financial markets (including stock markets and currency markets) are volatility machines.

After rising 50% for the past decade in trade-weighted terms, the renminbi recently depreciated by less than 6% in terms of the US dollar. Why has this depreciation become such a big deal that it has created a commotion among China observers in the Western countries? I would also like to state flatly that not what happens in China's stock markets but the progress on economic reform will determine the fate of China's economy.

Moreover, I hope firstly that policymakers communicate to the Chinese people (as well as markets) and make them understand that their economic policymaking is strictly based on the traditional Chinese philosophy that the economy exists for the human person, not vice versa.

It should be also noted that President Xi Jinping's anti-corruption campaign is consistent with such a philosophy. If the people better understand government policy in terms of its intention and direction, they would be more willing to endure any temporary hardship.

Second, on specific policy level, I would suggest the following two actions:

(a)China should reduce the debt to GDP ratio (or credit to deposit ratio), because history shows that too much debt was a primary source of financial crises. Let me hasten to add that such a reduction of debt should be gradual over time, not abrupt.

(b)Watchdogs should strengthen capital controls temporarily to prevent speculators from causing massive swings in exchange rates. Let me remind you that under the Bretton Woods system which used capital controls, banking, financial and sovereign debt crises were far less frequent.

The opinions expressed here are those of the writer and don't represent views of China Daily website.

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