China's Make or Break Moment

James Chang says the Chinese government must inject capital domestically to stimulate economic growth.

NEW YORK, February 12, 2009 - China may be touted as the savior for the US, but it's clear that the specter of financial downturn has turned the Chinese government away from the export-oriented model that historically brought unparalleled growth to their economy.

But will it be enough? A panel of business experts at the Asia Society concluded that the Chinese economic and political model is going to need a considerable overhaul in order to weather the global financial crisis.

James Chang, a Partner in Pricewaterhouse Coopers' Financial Risk Management Advisory practice in New York, argued that the current imbalances in the global economy will work themselves out if resources are appropriately and swiftly allocated to the sectors that require the most attention. For China, this means that the government must inject capital domestically to stimulate economic growth. As Chang sees it, the Chinese government is already taking the necessary steps by pressing companies to reduce layoffs, warning financial firms of the risk inherent in outbound activity, spending on vocational training, and creating new jobs.

With China's global exports down 17.5 percent in January of this year, one of its major vulnerabilities is its industrial surplus production, for which some demand must be created domestically. Panelist Howard Chao, partner in charge of O'Melveny & Myers' Asia practice, expressed guarded optimism about China's domestic economy, noting that its regulated banking system is somewhat insulated from the recession. He also suggested that the government’s primary agenda should be to create a reliable social net for its citizens by providing housing and medical aid. Chao also noted the irony of China's being criticized for its planned economy at a moment when it's increasingly apparent that the West may have gone too far with deregulation.

Responding to moderator Henny Sender, international financial correspondent for the Financial Times, the panelists expressed deep concern that political corruption may impede China's recovery. They voiced similar concerns about the slowdown in environmental measures, for which the panelists blamed the GDP-based promotion system that discourages Chinese officials from focusing on environmental issues, especially given the current state of affairs.

China's new orientation is clear, but its recovery will depend on careful implementation of economic and social reforms. Its impending transformation will almost certainly alter ties with the US and create a new standing for the country in the global sphere—favorable or not—that will only become apparent over the next few months.

Reported by Chandani Punia