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UPDATED: October 28, 2008 NO. 44 OCT. 30, 2008
The Alarm Bell Rings for China
Despite the global financial crisis and lower-than-expected third-quarter GDP growth, the country's overall economic conditions remain relatively stable
By LIU YUNYUN
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First, the world credit crunch would dampen foreign direct investment (FDI) in China, Li said. Since the adoption of the reform and opening-up policy in 1978, China has become a hot destination for FDI, which has contributed a great amount to the country's economic development. Last year, China attracted $74.8 billion in FDI and absorbed another $74.4 billion in the first nine months of this year. Although FDI growth has remained robust so far, future FDI would probably be curtailed because developed countries are suffering from shortages of money, Li said.

Second, the world economic slowdown would slash China's exports, because foreign consumers did not have money in their pockets to spend, Li said. Exports accounted for 37.5 percent of China's GDP in 2007. But they turned out to be a cause for GDP slowdown in the first three quarters. China's GDP growth rate in the first three quarters was down 2.3 percentage points compared with the same period last year, while export growth dropped 4.8 percentage points year on year.

Third, the financial crisis could suppress investor and consumer confidence, Li said. "Investment and consumption are based on people's expectations about future economic development," he said. "But they are now overwhelmed by the daunting challenges of the financial crisis, and China is no exception."

Despite these problems, experts argue that China's economy is developing soundly. Wang Qing, Chief Economist for Greater China at Morgan Stanley & Co. International Plc., said in a report that China has not suffered any major setbacks from the global financial crisis, and it is a "safe land in the wake of global financial storm." He cited several reasons. Leverage, a commonly used tool in foreign financial markets to generate big profits with a small amount of principal, has not been well-received in China, which has reduced the country's potential financial risks. The fast accumulation of foreign exchange reserves, capital account controls, sufficient capital liquidity and the conservative operations of commercial banks also have diminished financial risks in China.

Wang said China has plenty of policy choices to fend off a possible economic recession, such as raising the personal income tax threshold to boost consumption, increasing government expenditures on infrastructure to create jobs, and expanding domestic demand for goods.

Merrill Lynch & Co. said in a report that China and Japan are key positives for the region and the world. "Both are large economies with liquid banking systems, and should prove to be insulated from the global de-leveraging process," the report said.

Relying on domestic demand

On observing the changing trend, Li proposed that the government expand domestic consumption and investment to boost national economic performance at a time when the Chinese products are experiencing less demand from international markets. Li said the country needed to boost its investment in agriculture, which remains a weak link in the national economy.

"We also have to improve infrastructures like transportation and urban construction," Li said. "To achieve the goal of balanced development on a national scale, we also must promote investment in the central and western part of the nation."

Li also urged companies to tap into the great potential of mainland consumption. "Both urban and rural residents long to improve their housing conditions, and they have a strong demand for all kinds of services and durable products like cars," Li said.

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