Zhu Rongji

Hard landing may be good medicine

PUBLISHED : Monday, 08 August, 2011, 12:00am
UPDATED : Monday, 08 August, 2011, 12:00am


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As uncertainty about whether the global economy is heading into a double-dip recession resurfaces, worries about China's economic growth are also set to bubble over as investors brace for more volatility in the stock, currency, and bond markets in the weeks or months ahead.

Mainland leaders are facing an acute dilemma in steering the world's second-largest economy.

On one hand, Standard & Poor's decision to cut the United States' triple-A credit rating last week is the latest ominous sign of the dark cloud hanging over the troubled US and European economies, adding to further uncertainty over the strength of China's exports, one of the key engines of growth.

On the other hand, confronted with soaring inflation and a property bubble, mainland leaders have been taking aggressive measures to tighten bank lending and reduce government spending. But that has given rise to concerns that overly tight measures could result in a hard landing for the mainland economy, leading to social instability.

In the next few days, the central government is expected to publish the economic indicators for July, and it is anticipated these will show inflation continued to remain above 6 per cent despite easing somewhat from June.

This means the government will have no choice but to continue its tight monetary policy in the short term. But the renewed concerns over the risk of the global economy plunging into a recession also heighten the prospects of a hard landing.

As policymakers weigh the risks of both overtightening and insufficient tightening, one thing is clear: the mainland's economic growth rate will follow a downward trend in the coming years.

Another prediction is that if the world economy does enter a recession, the mainland is very unlikely to play the role of saviour again as it did in 2008 and 2009 when it launched a 4 trillion yuan (HK$4.8 trillion) stimulus package to engineer a rebound in the mainland economy and thus help the recovery of the global economy.

While this may cause concern for investors who have become accustomed to the mainland's double-digit growth rates in the past three decades, it is in fact good news for China. Slower growth - even a significant slowdown - can present a unique opportunity for policymakers to change the way the economy grows, a monumental task they set for the current five-year plan.

Mainland leaders including Premier Wen Jiabao have repeatedly said China's current growth model, which relies heavily on government spending and property investment, is 'unbalanced, unstable, and unsustainable' and exerts too much pressure on resources and the environment.

But their efforts to address the structural issues in the economy have understandably led to patchy results in times of economic boom.

A slower economy or - even better - a hard landing could enable the mainland's leaders to fix the systemic issues for a healthier economic growth path. As past history has shown, the mainland's major positive economic adjustments usually came after economic crises prompted leaders to take aggressive measures to reform the economy.

The current leaders should learn from the courage and wisdom of former economic tsar Zhu Rongji. In the early 1990s, China was faced with an even worse crisis than today, as its economy risked going out of control with double-digit inflation and a property bubble fuelled by bank lending.

Zhu took resolute action by sacking the central bank governor, taking the helm himself and ordering banks to recall property loans to allow the property bubble to burst. The ensuing aggressive and effective adjustments pulled the economy back from the brink of collapse and put it on a healthier track to pave the way for the economic lift-off.

Compared with those times, the Chinese leaders now have better tools and resources at hand to deflate the property bubble and counter the effects of slower growth.

It is significant to note that Liu Mingkang, head of the China Banking Regulatory Commission, recently revealed in an interview that stress tests had shown mainland banks would be able to cope even if mainland property prices fell by as much as 50 per cent in the worst case scenario.

Short-term pain is worth it if it can lead to the long-term benefits of a healthier economy.