Opinion | China's credit crunch is a wake-up call for economic restructuring
Hu Shuli calls for government resolve to tackle excess capacity and high debt, while encouraging the development of private enterprise
The recent cash crunch in China's interbank lending market has only exposed the fundamental problem of its economic distortions. For policymakers who are still dithering over whether to pursue restructuring or growth, here is the answer: there can be no growth without restructuring.
This liquidity squeeze that came out of the blue was no mere problem in the financial sector; it is rooted in problems in China's real economy. An unbalanced, unco-ordinated and unsustainable real economy is the reason large amounts of cash are needed to keep it afloat, with much of it invested in unproductive sectors such as property and financial products that fund local governments.
Over the past five to 10 years, China has relied on a development model that uses high debt to finance growth. But that no longer works.
It must now target the problems of excess capacity and overly high debt, and encourage the development of private enterprise. More importantly, policies must take into account the global outlook.
Excess capacity is the biggest stumbling block to growth right now. Though the problem affects many economies hit by the financial crisis, in China, it is compounded by the years of undue government intervention in the economy and stalled reform in the markets for land, labour and other factors of production. Furthermore, industrial policies in the past were made with little regard to global demand.
The government must work with the market to deal with excess capacity. The market's self-regulating ability enables it to set the right prices and weed out weaker competition - all of which would be sound preparation for Chinese companies going global.
China must boost its domestic consumption to drive economic growth. But while the excess capacity that arises from cyclical fluctuations could and should be absorbed by the domestic markets, China must also think global; government and business should work together to develop an international market for Chinese goods and services.