Bold plan best option for economy

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By Hong Liang (China Daily)
Updated: 2008-10-21 07:48

While the roller-coaster ride of the world stock markets in the past several weeks has kept our adrenal pumping, the real issue that will have a direct impact on our lives is the economic recession that is spreading from the US to the rest of the world.

Many economists, including the 2008 Nobel laureate Paul Krugman, agree that the US economy is in recession. It's really not a question of whether it will happen, but rather how deeply it will go.

The US economy began to show signs of weakening months before the outbreak of the credit crisis. Some economists hold the view that the collapse of the subprime mortgage market was triggered by worsening economic trends that pulled the rug from under the feet of the property sector.

While governments of many countries around the world are preoccupied with their multi-billion dollar bailout plans to unclog the credit seizure, the global economy, led by the US, is sliding deeper into recession. With less than three weeks to go before the presidential election, the Bush administration isn't in the position to introduce any major economic stimulation programs needed to reverse the downward trend. For that reason, it is widely expected that the US economy is going to get worse before it gets better.

Such expectations could lead to further decline in investment and consumer spending, which was the main engine of economic growth in the past up-cycle. Before that cycle peaked early this year, rampant consumer spending, underscored by a buoyant property market, sucked in vast amounts of imports from around the world.

As consumers' confidence was battered by the economic downturn and the fallout of the credit crisis, demand has been fast shrinking. People in all walks of life are tightening the purse string to prepare for the hard times ahead. This is having a profound impact on emerging economies, including China, which rely heavily on exports to fuel growth.

Ignoring the underlying economic trend, many stock analysts and economic commentators in China have stepped up their calls for government actions to shore up the beleaguered stock market, where the lead indicator has dived more than 60 percent, despite occasional rebounds, since its peak in October 2007. The apparent failure of numerous measures introduced in the past several months to lift the market out of the doldrums has clearly demonstrated the corrosion of the underlying economic fundamentals.

As some economists have warned, the property market slump in major cities, including Shenzhen, Shanghai and Beijing, is posing a serious threat to the highly geared developers, who have been aggressively cutting prices to promote sales. This, in turn, is pushing prices down even further.

As prices continue to fall, many home owners could find themselves in the demoralizing situation of negative equity when the market value of the property sinks below the outstanding portion of the mortgage loan. This would be bad for not only the borrowers but also the lenders, who must make provisions for depreciating collaterals and a potential increase in defaults.

Less obvious are the problems facing many manufacturers, especially those in the steel and heavy machinery sectors, who geared up aggressively in the past few years to meet projected increases in export sales. Those projections now look less and less realistic. Without a large enough domestic economy to soak up the export slag, many steel producers, for instance, have to drastically cut production to save costs and reduce prices to promote sales.

What we need now is a bold plan to keep the economy on an even keel rather than petty measures to lift share prices. The performance of the stock market should reflect the projected state of the economy six months ahead. As any stock analyst should know, a bull market must be underscored by confidence in the prospect of the economy.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 10/21/2008 page8)