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Facing a global challenge from behind a financial Great Wall

Ed Zhang

One hot topic for mainland press commentators in the past few weeks has been the global economic situation, amid fears of a downturn similar to the crisis of 2008, and what China should do to maintain its own economic health and - if possible - contribute to global growth.

More than three years after the collapse of the Wall Street investment bank Lehman Brothers, the world is once again besieged by worrisome signs from Europe, the United States and emerging market economies. Almost every stock market has been exhibiting high levels of volatility.

The Chinese-language Financial News, a mouthpiece of the People's Bank of China - the mainland's central bank - published a lengthy analysis on Monday calling for China to erect a 'financial Great Wall' to resist the worsening global economic situation, which it called a 'deepening phase' of the 2008 crisis.

The analysis quoted from a survey by a domestic asset management company that found that most Chinese bankers believe that the mainland is likely to face the threat of a growing cluster of non-performing loans (NPLs), or defaults in loan paybacks, around 2013.

NPLs would account for up to 15 per cent of the total funds raised by 'financing vehicles' under the control of local governments.

Across the mainland, NPLs would exceed one trillion yuan (HK$1.21 trillion), mainly in industries such as steelmaking and alternative energy generation, where they would account for 15 per cent of all loans.

Meanwhile, in the railways sector, as a result of the rush to build high-speed lines, NPLs would comprise more than 10 per cent of total loans.

Building a financial Great Wall would require, the analysis said, that China strictly control all domestic risks, including local government debt, loans to local financial platforms, bubbles in the real estate market, high-speed-rail projects and new financial experimentation, and encourage more small 'urban commercial banks' and credit co-ops.

Only after doing so, the analysis said, could China join other emerging market economies in making greater contributions to the International Monetary Fund within the G20 framework, and thus help the early recovery of the global economy.

Ba Shusong, a senior economist with the State Council's Development Research Centre, has commented to various media, including the official China Central Television, basically saying that a second dip is already on its way.

Overall, since the mainland's dependence on exports has declined in the past three years, the impact of the global economic deterioration on China would not be as strong as in 2008 - even though it could be a tougher challenge to some other countries, Ba said in an interview with the China Securities Journal.

However, he said, China's small and medium-sized enterprises would face much larger difficulties - worse than in 2008. Ba said the solution was for the central government to grant SMEs tax cuts and exemptions from other financial burdens.

Ba said he believed the mainland had little room to significantly loosen its money supply, no matter the monetary policies followed by the US and the euro zone. He also said there was no short-term solution to mainland inflation and China could not expect to sustain its growth rate by providing more credit to society. Instead, in the coming months, the government should try to rebalance the economy by adjusting key prices.

A Guangzhou Daily commentary agreed with Ba that it would not be appropriate for China to seek any quantitative easing to help its economy. 'The winter has just come,' it said. 'The spring is still far away.'

At the same time, the business press has been calling for more effective measures to maintain the international financial order. The latest issue of Caijing Magazine, published on Friday, carries an article calling for the IMF to really play its role as an international financial policeman, while in the Chinese edition of the Global Times a commentary demanded that Europe learn the lesson from the rapid expansion of the euro zone in the past few years. It compared that expansion to Mao Zedong's Great Leap Forward, which resulted in millions of deaths from starvation in the early 1960s.

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