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Pursuing new economic role is a tough task for China

(Xinhua)
Updated: 2008-11-09 19:32

Classical Views Don't Work

"In classical terms, [an economic] crisis is often a U-shaped. But it's very possible for the world economy to go L-form, featuring stagflation -- low growth and high prices -- where classical textbooks don't work," she said.

There would be no one-size-fits-all, she said. Creativity, imagination and political responsibilities would be crucial for all nations, big or small, as no nation alone could survive.

"The downturn is very visible in the United States and Europe. It's no good pointing fingers. Everybody is in trouble."

Grybauskaite was here last week to exchange views with Finance Minister Xie Xuren over the role of fiscal policy in addressing financial crises.

Although she didn't want to get too involved in China's internal challenges, she briefly touched on tax reform plans to tackle domestic imbalances and the inefficiency of capital use at the local level.

Best Option

Roach made it clear that China could best help the world through a rebalancing of its own economy -- namely, by shifting its growth dynamic away from excessive reliance on exports and fixed investment toward a greater growth impetus from private consumption.

"If China's leadership would own up to its role in perpetuating the nation's share of global imbalances and take concrete steps toward rebalancing, then the rest of Asia -- to say nothing of those elsewhere in the world -- would have no choice but to respond," he said.

Despite the lack of commonly-accepted criteria to gauge a nation's sway in the world economy, Roach said China's influence lay primarily in commodities, dollar-based financial assets and Pan-Asia trade.

Over the past seven years, a resource-intensive Chinese economy has accounted for close to 50 percent of the cumulative global growth in the combined demand for oil, base metals and other industrial materials.

Meanwhile, he said, the dollar-centric recycling of China's massive $2 trillion in foreign reserves has a significant impact on dollar-based asset prices and, by inference, on overall trends in world financial markets.

Given that China has led the increased integration of pan-regional Asia trade by being a crucial export market for Japan, the Republic of Korea, Taiwan and others after the 1997 Asia crisis, Beijing's rebalancing was also likely to weaken Asian regional trade and push other Asian countries that rely on external demand to rely more on domestic consumption.

Big Naitons, Big Consequences

"In a globalized world, the actions of one large nation have clear and important consequences for others. This could be one of China's best opportunities to demonstrate its global economic leadership prowess," said Roach.

With the scientific development outlook officially proposed by the top leadership last October, China has "looked in the mirror" by embarking on the tough road of rebalancing. But consumption demand takes much longer to stimulate than investment and exports. That means an economic slowdown and weakening demand for industrial materials.

Since it's still a developing nation, China is being advised to re-examine policies that might perpetuate domestic imbalances including its mercantilistic currency and foreign reserve management policies, a limited social safety net, and incomplete financial reforms that aggravate the excesses of bank-directed investment spending.

"Given its enormous scale, as China moves down the path of reform and development, its progress will automatically be associated with a greater role in the global economy," said Roach.