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World economy still follows W-shaped trend

By Tang Shuangning (People's Daily Overseas Edition)

16:12, August 17, 2011

Edited and Translated by People's Daily Online

The recent U.S. credit rating downgrade has led to widespread market turbulence with intensified fights between bullish and bearish investors in the global stock market and drastic fluctuations in major indexes and has resulted in world tension.

How to view the downgrade of the U.S. AAA credit rating? I once said in the early period of the international financial crisis that according to the philosophical theory of wave-like progress, the global economic recovery would undergo a gradual W-shaped process from its lower-case to higher-case and then from higher-case to lower-case. From the eruption of the sub-prime credit crisis triggered by New Century's bankruptcy protection application to Lehman Brothers' bankruptcy was the shift of the "W-shaped" crisis from its lower-case to higher-case.

From Lehman Brothers' bankruptcy to the subsequent Dubai event, investigation into Goldman Sachs, delisting of Fannie Mae and Freddie Mac and European sovereignty debt crisis was the shift of the "W-shaped" crisis from its higher-case to lower-case.

The U.S. national debt crisis has undermined market confidence because people are well aware that the U.S. Democratic and Republican parties have gone excessively far in playing the "hoax of yin and yang" on the world. Furthermore, the overlapping impact of the U.S. and European debt crisis and the interaction between the financial and fiscal crisis as well as between economic and social crises have plunged the world into panic and confusion.

However, despite the confusing situation, the world economy has still been following the "W-shaped" trend shifting from lower-case to higher-case. The aforementioned facts show that the U.S. and European debt crises are not surprising. Although the crisis is still not over, it does not represent the "end of the world" and the "W-shape" has remained a basic trend for the world economy in the future.

The U.S. and European debt crises have had some negative effects on China's financial sector, foreign trade and consumer prices. First, the value of the country's foreign exchange reserves has shrunk. Second, the decline in external demand caused by RMB appreciation pressure and weak U.S. economic recovery will further hinder the country's exports. Second, if the United States implements a third round of quantitative easing monetary policy, China will face greater pressure from imported inflation. Despite all difficulties, China should keep calm, maintain initiative, focus on its own development, avoid playing the role of global savior, and take measures to offset the negative effects of the debt crises.

First, China should make greater efforts to curb inflation. The country's inflation rate has reached nearly 7 percent, which is unacceptable both politically and economically. More hot money may flow into China as the United States keeps its interest rates at near-zero levels and plans to implement the third round of quantitative easing monetary policy. In light of this, China must maintain a sound, proactive and moderately tight monetary policy.

Second, China should accelerate adjusting its massive foreign exchange reserves. There are five channels for wisely using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investments, issuing foreign bonds, and improving the people's livelihood. The country should also encourage the people to invest in international bonds. However, these strategies can only alleviate the symptoms of the "illness" affecting China's foreign exchange system. The key to completely curing the illness is to reform the mechanism of how the reserves are generated and managed.

Third, China should pay more attention to financial risks.

The first one is the risk of financing platforms. Local financing platforms once played a positive role in resisting financial crises, but the risk of them cannot be ignored. If the macroeconomic situation is good, the risk is controllable. But if the macroeconomic situation is worsening, the frequently mentioned "tidal effect" will appear. After the "tide water" has ebbed, "reefs" will emerge, and even good assets of banks will turn into bad assets. Therefore, "financing platforms" must be classified and rated. Some of them must be protected and some must be limited, and all of them must be standardized perfectly.

The second one is the fluidity risk of small and medium-sized banks. Under the pressure of the current high reserve rate, some small and medium-sized banks are facing the risk of a break in the capital chain. Small and medium-sized banks are directly connected with small and medium-sized enterprises. If the risk is not dealt with successfully, the domino effect will appear, leading to a surviving risk of small and medium-sized enterprises. Therefore, China should treat the banks in different ways while making policies.

The third one is the risk of stock markets. If Europe and the United States get ill, the whole world has to take medicine. China is not an exception. The stock markets of China are still relatively immature markets currently, and China needs make efforts to prevent excessive irrational reactions in the markets. Currently, Chin needs to well do the anticipation management work especially and build confidence for the markets.

The author is a special commentator for People's Daily and the President of China Everbright Bank.


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