Zhang Monan

An open investment race

By Zhang Monan (China Daily)
Updated: 2010-03-30 07:51

Editor's note: To sustain the economic growth in a long term, China needs to boost the private investment to break the unreasonable State monopoly in some industries.

The flow of private capital into a growing number of sectors could sustain economic growth and limit govt intervention

The State Council recently issued a guideline on the development of nongovernmental capital, opening the doors of the country's monopolistic industries, public facilities, infrastructure, social undertakings and financial services to non-official investment.

The new document, with its roots in another document put into effect by China's cabinet four years ago, will significantly alter the country's capital investment landscape.

Since the global financial crisis, the "State advancement and exit of private sectors" term in China's investment market has been heavily scrutinized. The New Weekly, a Guangdong-based magazine, last year listed this investment trend as one of the top-10 phrases to describe the country's current economic outlook.

There are signs of recovery from the unprecedented global economic recession, but the recovery lacks a solid foundation of support and the path to a full recuperation remains tortuous. For every country, the immediate challenge is how to regain momentum in their economic development as early as possible, pass the investment relay baton from the government to the private sector, and reduce repercussions likely to be caused by possible government policy changes.

The global economic recovery was largely attributed to a spate of stimulus packages launched by countries across the world. In other words, it wasn't driven by market factors. A full global recovery, however, is still uncertain.

As a country now in the middle stages of its industrialization, China has long been plagued by a faulty investment structure and low investment efficiency.

With a large-scale investment campaign recently launched to boost the national economy, efforts should be made to break the long-held monopoly by State-owned sectors in investments. The State must open public facilities, infrastructure construction, medical care and education, financial services and even the development of national defense sciences and technologies to more active and vigorous non-official investment.

A set of well-developed institutional guarantees should be established to encourage and direct the flow of high-quality unofficial capital to State-owned investment fields in a variety of forms.

The public controversies about "State advancement and exit of private sectors" in China's investment fields make it necessary for the government to explicitly define its role from that of the market. The eruption of the subprime mortgage crisis in the US was largely caused by the government's failure to act, although there were already flaws in the market.

The disengagement between the government and the market has contributed much to a disorderly situation. The low interest rate policy adopted by the US has added to fluidity and led to bubbles, which triggered the global financial crisis.

The global financial crisis has misled people and made them believe in an omnipotent government intervention. The US, a country who has long advocated economic liberty, has even turned to federal capitalism to cure lingering economic malaises. As a result of the crisis, the Keynesianism that advocates strong government role in economic affairs tends to gain ground once again in some Western countries as the last tool to counter an economic crisis.

Facts prove that government intervention does not effectively evade fluctuations brought on by normal economic cycles. The vicious stagflation in the 1970s and several economic crises that ensued were the best evidence of government failure to extricate economic development from the traditional cycles. On the contrary, economic crises have only increased financial burden on governments and undermined its regulating capability. The large-scale government interventions amid the global financial crisis have catalyzed a serious after-effect, such as growing government debt, as indicated by the sovereign debt crisis in some countries.

Since the global crisis, developed countries have launched $5 trillion dollars in stimulus plans, which have mainly flowed to financial and capital markets and played a muted role in boosting the development of the economy.

As a result, the terrible "liquidity trap" has emerged in these countries, as indicated by their economic sluggishness, insufficient demands, softened private investment and consumption as well as soaring unemployment rates. Due to a gloomy investment and economic prospect, the record low interest rate embraced by Western countries still fails to work in boosting domestic investment and consumption. The expansion of government spending, along with other stimulus measures such as tax reductions, has further worsened financial burdens on these governments. A loose financial and monetary policy means the divergence of various kinds of economic risks on the government and a bulging debt. At the same time, effective social demands remain inadequate and investment soft. Last year, enterprise investment in the US declined by 17.9 percent, the largest yearly drop since 1942.

As the world's fastest-growing economy, China has yet to resolve a series of complicated and intertwined economic issues if it wants to achieve a rapid and sustainable growth. The latest guideline issued by the State Council about promoting unofficial capital investment is expected to help pass the country's investment relay baton from the hand of the government to nonpublic sectors. It is the result of the Chinese government's profound reflections on the construction of a counter-crisis mechanism. A good economic system is not based on government-dependent stimulations, but aims to break the unreasonable State monopoly and guarantee a freed economic operation and capital flow.

The author is an economics researcher with the State Information Center.

(China Daily 03/30/2010 page8)