WHAT FI­NAN­CIAL CRASHES TEACH US

Tar­geted struc­tural re­forms are es­sen­tial to eco­nomic growth and sta­bil­ity

Beijing Review - - COVER STORY - By Wang Yongli

EThe au­thor is for­mer vice pres­i­dent of Bank of China and a se­nior re­searcher with the Chongyang In­sti­tute for Fi­nan­cial Stud­ies of Ren­min Uni­ver­sity of China

rupt­ing in Septem­ber 2008, the global fi­nan­cial cri­sis has lasted a decade. Af­ter the cri­sis, the world­wide trend of sur­plus pro­duc­tion ca­pac­ity and in­ad­e­quate de­mand could not be re­versed and the world econ­omy has re­mained slug­gish, lead­ing to sig­nif­i­cant changes in the world and cre­at­ing se­ri­ous so­cial prob­lems. We need to an­a­lyze the root causes and lessons of the cri­sis so as to bet­ter ad­dress any likely new cri­sis.

Af­ter the cri­sis, many rea­sons were listed, such as greedy fi­nan­cial in­sti­tu­tions and fi­nan­cial prod­uct in­vestors who cared only for high in­vest­ment re­turns but were re­gard­less of the high risks; loop­holes in the ac­count­ing sys­tem and prob­lem­atic prac­tices and prin­ci­ples of the in­dus­try; ir­re­spon­si­ble rat­ing firms whose credit scores were not in line with facts; and ex­ces­sive fi­nan­cial in­no­va­tion but in­com­pat­i­ble fi­nan­cial reg­u­la­tion, which caused sys­temic risks.

All these need to be rec­ti­fied, but they are not the root causes of the once-in-acen­tury cri­sis. Against the back­ground of glob­al­iza­tion and the his­tory of the 20th cen­tury, we can fig­ure out the real root cause: the mas­sive sur­plus caused by in­for­ma­tion asym­me­try and in­ad­e­quacy dur­ing the process of in­ter­na­tional cap­i­tal and pro­duc­tion ca­pac­ity trans­fer. It led to both the Great De­pres­sion in the 1930s and the re­cent Great Re­ces­sion.

Causes of the cri­sis

Since the end of World War II, in­creas­ing amounts of in­ter­na­tional cap­i­tal and pro­duc­tion ca­pac­ity have flowed to Latin Amer­ica, South­east Asia, East Europe and then China, ac­cel­er­at­ing eco­nomic glob­al­iza­tion and chang­ing the world trade struc­ture. Along with the ar­rival of global cap­i­tal and pro­duc­tion in a cer­tain re­gion, as­set bub­bles and fi­nan­cial risks also emerged and in­ten­si­fied while these funds and pro­duc­tion ca­pac­ity pro­moted lo­cal eco­nomic and so­cial de­vel­op­ment. Once such prob­lems oc­curred, cap­i­tal soon moved to other mar­kets, caus­ing fi­nan­cial or eco­nomic crises. Af­fected economies had to in­put more money and pro­duc­tion ca­pac­ity to res­cue the econ­omy, lead­ing to more re­dun­dant liq­uid­ity and pro­duc­tion ca­pac­ity. As such crises ex­panded, there was a world­wide sur­plus of ca­pac­ity and liq­uid­ity, trig­ger­ing a global fi­nan­cial and eco­nomic cri­sis as a re­sult.

With the ex­pan­sion of world pop­u­la­tion and a re­stric­tion of the globe’s bear­ing ca­pac­ity, there has been over­ca­pac­ity and in­ad­e­quate ef­fec­tive de­mand through­out the world, which will not be re­versed within a short time. Un­der such cir­cum­stances, stim­u­lus poli­cies will only cause more prob­lems, chal­leng­ing the ef­fec­tive­ness of many ma­jor eco­nomic the­o­ries and macroe­co­nomic poli­cies.

Af­ter the global fi­nan­cial cri­sis broke out in 2008, ma­jor economies of the world sig­nif­i­cantly in­creased money sup­ply and ex­panded pro­duc­tion ca­pac­ity. Although this curbed rapid wors­en­ing of the cri­sis and helped avoid the col­lapse of the fi­nan­cial mar­ket, it also cre­ated more risks and new fac­tors for cri­sis, ex­haust­ing the po­ten­tial of ex­ist­ing pol­icy in­stru­ments. To­gether with ris­ing trade pro­tec­tion­ism, uni­lat­er­al­ism and pop­ulism, a more se­ri­ous cri­sis is loom­ing over the world.

China’s ac­tions

Af­ter the cri­sis broke out, China im­me­di­ately read­justed its macroe­co­nomic pol­icy and launched a mas­sive stim­u­lus pack­age, mak­ing it the first ma­jor econ­omy mak­ing a re­bound. China then be­came the sec­ond largest econ­omy in the world, with its role in in­ter­na­tional af­fairs re­mark­ably im­proved. But af­ter that China faced in­creas­ing eco­nomic down­ward pres­sure, en­ter­ing a new stage of de­vel­op­ment where deeper and more ex­ten­sive re­form and open­ing up is needed.

As China be­came the sec­ond largest econ­omy and the gap with the United States nar­rowed, the United States has sought to con­tain China.

In­side China, the eco­nomic down­ward pres­sure con­tin­ued from 2011 to the end of 2017.

The 19th Na­tional Congress of the Com­mu­nist Party of China in Oc­to­ber 2017 es­tab­lished a goal: By the mid­dle of the 21st cen­tury, China will have be­come a global leader in terms of com­pos­ite na­tional strength and in­ter­na­tional in­flu­ence. This goal is of vi­tal im­por­tance. But it in­evitably wor­ried the United States. Now the United States has launched a trade war against China, pos­ing new chal­lenges to China’s de­vel­op­ment. Like the first half of the 20th cen­tury, the first half of this cen­tury is also an era of dras­tic in­ter­nal changes and ex­ter­nal chal­lenges for China.

China has now en­tered a key stage of eco­nomic trans­for­ma­tion, fac­ing var­i­ous daunt­ing tasks. Of them, pre­vent­ing and ad­dress­ing ma­jor fi­nan­cial risks has be-

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