The government has been introducing a string of policies to stabilize the economy and cushion the impact of the global economic slowdown since October. These policies are generally deemed "timely" and "necessary," but not a long-term cure for problems in China's economy. Renowned economist Wu Jinglian says the country must address its "double imbalance" and further reform its economic growth mode. He made his comments at the First Annual Global Management Forum on December 6 in Shanghai. Excerpts follow:

The Chinese economy is challenged by a "double imbalance"-the domestic imbalance caused by excess investment and insufficient consumption, and the external imbalance due to surpluses in international trade and payments as well as the huge foreign exchange reserves.

Investment accounts for 45 percent of GDP currently in China, increasing from 30 percent three decades ago. Economic signals of a double imbalance at the macro-level include limited room for monetary policies to function, excessive liquidity and asset price hikes.

These imbalances are rooted in China's current economic growth mode, which relies heavily on investment, natural resource consumption and the development of heavy industry. If the government lets loose the double imbalance, it will lead to overcapacity, deflation and even give rise to risks within the financial system.

The global financial crisis has made China's economic transition much more difficult to accomplish, while contradictions within the old economic growth mode have intensified. The crisis has had a limited direct impact on China, but it has caused the bubbles in China's financial system to burst, leading to a shortage of liquidity in Chinese companies. The largest impact was delivered to China's exports due to shrinking overseas demand for Chinese products.

The policies the Chinese Govern-ment has worked out since October are short-term by nature and may give rise to problems without proper implementation. In the long run, the government has to consider helping the real economy-small and medium-sized enterprises in particular-stave off a cash crisis. In essence, the Chinese Government must adopt a sustainable economic growth mode.

China put forward the need for a fundamental change in its economic growth mode in 1995, but has failed to realize the goal due to institutional obstacles. For example, local governments control the right to allocate important resources such as loans and land. In many regions GDP growth rates remain the key yardstick for evaluating the performance of government officials. Local governments' fiscal revenues are closely linked to the growth speed of material-goods production. All these factors have directed local governments toward short-term economic interests rather than long-term economic health.

China has to further promote reform to attain the goal, annul the old system's legacy and replace it with a new one, and allow the market to play a fundamental role in resource allocation. At the same time, the government should establish related laws and political systems to ensure market efficiency.

Difficulties and obstacles are inevitable, as the administration reform will involve the rights and interests of government officials. Yet, the reform will remain a decisive factor in guiding the development of China's economy in the future.