Despite China’s strong current financial and economic position, a focus on China must highlight China's secondary role in the current global turmoil and necessary actions to manage it. The current global crisis is best understood as another historical opportunity for progress in the evolution of the world’s advanced governance systems. So argues Albert Keidel in a new essay, which demonstrates that China appears poised to perform well going ahead, largely unharmed by the crisis. China has a financial system that, while immature, is commensurate with its level of development, and it is equipped both to withstand domestic contagion from the international crisis and to inject stimulus spending in strategic sectors and locations. Its capital account, while not closed per se, is adequate for handling the vagaries of speculative inflows and capital flight. Furthermore, China's economic growth is principally the result of domestic demand, not exports. Blaming it for the current crisis, although fashionable in some quarters, ignores a basic fact: while the American housing bubble began in 2000, China's oft-criticized trade surpluses did not become significant until the end of 2004. In reality, the crisis has its roots in four developments: (1) growing income inequality in the United States, (2) lobbying influence that prevents American politicians from imposing adequate regulatory oversight in the financial sector, (3) proliferation of complex but poorly regulated financial instruments in recent decades, and (4) imprudently sustained monetary policy injecting excessive liquidity into the U.S. and hence global economies after 2001.
The lessons to be learned from the turmoil of recent months apply far more to the world's advanced economies than they do to China, which is still at an early stage of its economic and political modernization. For the United States and other mature industrial powers, this crisis is an opportunity to take further steps forward in improving the functioning of a competitive and democratic capitalist system. These steps include better regulatory systems and better insulation for democratic processes from excessive influence on the part of wealthy special interests. Details of the recovery plan are also important. The current U.S. program of recapitalizing banks without diluting the value of existing ownership stakes is an invitation to a repetition of irresponsible risk-taking down the road. Current plans to inject liquidity into the world financial systems followed by significant deficit-financed spending in the real economy are the way to go. The question is whether the political actors involved have the will to deliver the appropriate scale and structure of such disbursements. Given the severity of the financial "trigger" for this crisis, the greatest danger is of a downward "Keynesian spiral" whereby declining consumption and declining investment reinforce each other. The United States cannot afford to make the mistakes of FDR and his Congress in the 1930s, which could not escape popular emphasis on so-called “budgetary responsibility." The United States government is not a family sitting around the kitchen table. The world's effective money supply has collapsed. Only large-scale financial infusions and deficit spending can preempt a prolongued downturn.
China's economy is too small to be a major factor in the needed global recovery, but it can help -- especially if its import growth can remain strong. China should also lighten up its criticism of the West for causing this crisis. Such crises are the way the world's systems improve, in a learning-by-crisis effort at the frontier of institutional modernization. Only in several decades will China finally be at a stage in its modernization when it will need to study the lessons of this crisis. Until then, its major job is still catch-up in both economic growth and institutional sophisitication. Its current healthy status indicates it can do a very good job of such catch-up in the immediate future and for a long time to come.
The Carnegie Asia Program in Beijing and Washington provides clear and precise analysis to policy makers on the complex economic, security, and political developments in the Asia-Pacific region.
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