A Chinese Perspective of the Current Global Crises
Jianmao Wang
Professor of Economics
China Europe International Business School
November 2008
Every time there is a success or a failure in other countries, especially in those more advanced
than China, there is an opportunity for the Chinese to learn. Such learning happened 10 years ago
during the Asian Financial Crisis and is happening now. Therefore, the current global crisis is
offering valuable lessons for China to learn.
In fact, by slowing down the outflow of exports and the inflow of hot money, the current global
crisis is also helping China to cool down its overheated economy (growing more than 12% in 2007)
and forcing it to change its unsustainable investment-driven and export-led mode of growth. At the
micro level, the crisis offers opportunities for some capable Chinese enterprises to go global and
move up the value chain by acquiring foreign companies and their patents, brands, channels and
talents.
Of course, when three of the pillar industries in China—labor-intensive consumer goods,
automobiles and housing—slow down at the same time, there is the risk of a hard landing.
Fortunately, China can do at least three things to ensure a soft landing.
First, China can raise grain prices, which are lower in China than in the international market, by at
least one yuan per kilogram. This will increase the income of the poorest Chinese
population—hundreds of millions of grain farmers—by hundreds of billions of yuan, enabling
them to buy large quantities of labor-intensive consumer goods never affordable before. This will
also improve food security and reduce income disparity. The cost to the government will be a
subsidy to the urban poor, which can be easily financed by cutting existing subsidies on
resource-intensive products, which benefit the rich more than the poor.
Second, China can replace large-scale investment on superhighways and automobiles with that on
railways and trains. In fact, China’s railway system has been lagging behind its economy for
decades—in 2007, with 6% of the world’s railway length in operation, China’s railway system
carried 25% of the world’s railway volume. According to China’s Medium- to Long-term Plan for
the Development of a Multi-modal Transportation Network, the total length of China’s railways in
operation will be increased by at least 45,000 kilometers during 2006-2020, including 15,000
kilometers of dedicated passenger lines and intercity rail transit lines and 2,500 kilometers of city
rail transit lines. This will not only compensate for the slow down of the automobile industry but
also improve the energy efficiency, land efficiency and environmental efficiency of China’s
transportation system significantly.
Third, China can replace the current urban land leasehold system, whereby local
governments—the sole owners of all land in Chinese cities—collect lump-sum rent payments for
70 years up-front, with a system of annual rent, real estate gains tax and urban development bond.
Such a system will reduce the housing price by at least one third, making home ownership
affordable for a majority of urban residents, and ensure that local governments can borrow money
for urban development now and repay later.
Sometimes, the Chinese may learn the foreign lessons in both the right way and the wrong way.
An example of the former is that after the outbreak of the Asian Financial Crisis, China started to
improve the regulation and governance of its banking sector and to clean up non-performing loans.
An example of the latter is that China pegged its undervalued currency to US dollar, accumulating
excessive reserves of foreign currencies. Therefore, the current Chinese economic model appears
to be responding to this crisis much better than the one in the West because it is over-insured by
learning foreign lessons in the wrong way and paying extra premium of inefficiency.
I hope that the Chinese will learn all the foreign lessons in the right way this time. The Chinese
economic model has to evolve to match the fast development of the economy and China should try
to achieve the best balance between the role of the state and the role of the market. The memories
of disastrous failures of radical policies in the Great Leap Forward and the Great Cultural
Revolution are so painful that the “middle kingdom” should never deviate from the “middle way.”