It seems the present turmoil in global financial markets, especially the US markets, does not reflect changes in economic fundamentals but is rather the result of psychological factors.
A closer look at the global economy will show that the situation, while not good, is much better than during 2008 and 2009.
China’s gross domestic product (GDP) still grew 6.9 percent in 2015.
It will continue being one of the fastest growing economies in the world and a major engine of the world’s economic growth even if its GDP growth falls to 6 percent or 5.5 percent in coming years.
Frankly speaking, many foreigners barely understand China and the development of the country’s economy.
Because of China’s opacity, foreign investors are always either overly optimistic or too pessimistic.
They think of the worst while considering the issues of Chinese local government debts or bad loans in Chinese banks, and so on. Hence, market sentiment is low.
There’s no doubt strong growth in China supported the weak global economy after the 2008 financial crisis.
It is unfortunate that China is now slowing down while the US economy is showing signs of recovery.
It is necessary for both the economies to be on track for the world to be able to recover rapidly.
Besides the China factors, other political or social issues have led to low levels of sentiment in investment markets.
People lack confidence, resulting in vicious circle in the financial markets.
The root causes may be found in the measures taken to solve the 2008 financial crisis.
Back then, China allotted 4 trillion yuan to stimulate the domestic economy and subsequently maintained an annual GDP growth rate of over 9 percent for years.
But it led to today’s problem of overcapacity.
Investment can no longer effectively fuel the economy’s growth.
I believe the Chinese government can relieve the pessimism in the market and rebuild investors’ confidence in China by: 1) keeping the renminbi exchange rate stable; 2) improving policy transparency regarding the exchange rate and monetary policies; 3) adopting fiscal stimulus; 4) speeding up structural reforms in the state-owned enterprises and financial markets.
This article appeared in the Hong Kong Economic Journal on Mar. 1.
Translation by Myssie You
[Chinese version 中文版]
– Contact us at [email protected]