2010-07-28 15:42

The East and the West must balance their respective economic structures to thrive in the post-crisis world

Before we talk about our role in a new economic order, we have to achieve consensus on what the new economic order will look like after the financial crisis.

The best strategy is balance and compromise, according to ancient Chinese philosophers. Even a good thing will turn bad if it is overdone.

First, it's the balance between saving and spending. I always tease my American friends. I say, "You guys borrow tomorrow's money and spend that today; we Chinese save today's money for tomorrow. That's why you have a financial crisis."

Actually, I think we need to strike a balance between saving and spending. Easterners should save less and spend more, while the Westerners should save more and spend less. Then, we will achieve a better balance.

We have to balance domestic demand with exports. Countries in the East have to change their economic growth model, from export-oriented to domestic consumption-oriented.

This is not an easy transition however, as the most important thing is to increase the purchasing power of the people. In this case, we need to do a lot of things, including raising employees' salaries and other benefits. We need to build up credit systems so as to raise the purchasing power of the people.

People say the easiest way is to just let the renminbi appreciate. I don't think so, because the consumer goods portion of our imports accounts for less than 20 percent. Increasing the exchange rate only affects international purchasing power. What we need to do is increase the domestic purchasing power.

We also need to balance financial innovation and financial supervision. As you know, financial derivatives represent a double-edged sword. On the one hand, they can mitigate financial risks. On the other, they can be used as a tool for speculation.

So, financial innovation and financial supervision are mutually supplementary, and also mutually restricting. In this case, we need to encourage financial innovation, even as we prevent over-speculation in the financial derivatives market. Specifically, I think we need an international effort aimed at preventing over-speculation in financial innovation.

And then there is balance of the fictitious economy and real economy. The real economy is mainly based on tangible resources, while the fictitious economy is based on intangible resources, mainly, credit systems.

We need to balance these two, not only by making money through high rates or return. These high rates, on the one hand, mean high efficiency, so you can borrow others' money and use it to make more money. But on the other hand, it also means high risk. If your return is one percentage above the interest rate, you will gain. But if it's lower than the interest rate, you will be in trouble.

In the latter case, you will have a liquidity problem, because you don't have the money to pay back. A central bank cannot just focus on inflation as the sole objective of its monetary policy. This is because the fictitious economy, like the stock market and the housing market, can absorb liquidity.

The inflation rate can appear to be low when the housing and stock markets are booming, as it happened in the United States during 2002-2006. But if the winds change, the stock market and the housing market will release the liquidity on to the broader economy, which will cause a serious inflation problem. That's what we must take into account with respect to the fictitious economy.

Finally, there is the balance between sustainable development and economic growth. Climate change would be more important than the financial crisis in the long term. By developing new energy sources, we can kill three birds with one stone.

We can reduce the pressure of petroleum demand by developing new energy sources. We can reduce CO2 emissions and tackle the climate change problem. We can make biofuels from cellulose and semi-cellulose, rather than from corn or sugarcane, which means we can have more land to grow food for the people. It is very important to develop new energy sources. And new energy sources may be a central part of the next industrial revolution.

Currently, we are formulating a new long-range plan for new energy sources. This is a very difficult task because at this time the installed capacity of our power sector is around 700 million kw, and 70 percent of that is from coal. By the year 2020, our total installed capacity will be 1.4 billion kw, and we would like to reduce the dependence on coal from 70 to around 55 percent.

That means we will put a lot of effort into developing hydro, nuclear, wind, and solar power, and biofuels. The installed capacity of China's nuclear power currently is only about 10 million kw. By 2020, we will raise it to 60 million kw. And we would like to increase the installed capacity of wind power to 100 million kw by 2020.

We also have an energy-saving program. By the end of 2010, China will reduce energy consumption per GDP by 20 percent, and cut the carbon intensity further by 40 to 45 percent by the year 2020, from the 2005 level. That means we are seriously taking measures to deal with climate change and to develop new energy sources. This is a must for the sustainable development of the entire world.

The author is former vice-chairman of the Standing Committee of the National People's Congress.