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The world economy depends on China.

ySTANBUL (CyHAN)- The new year's global economic dynamics began with bad news coming from the Chinese economy.

Disappointing growth forecasts combined with growing debt have led to a major decline in the main stock index of the country. In many ways, this downturn was inevitable. Everyone expected China's economy would slow from its unsustainable double-digit growth rates. The real question was whether China would have a soft landing or a chaotic descent. The mistakes made by the Chinese leadership in recent months have turned the latter into a more likely scenario.

Yet, the Chinese leadership still has time to correct past mistakes and make fundamental changes in their management of the economy. The right place to start is to accept the limits of the command economy and to enact structural reforms strengthening the private sector and market dynamics. The Chinese boom in the years since the 2008 financial crisis has stemmed from lavish investment and spending. Most of this spending has been fueled by state-owned enterprises' excessive borrowing.

When the economy began showing signs of slowing down from 10 percent growth to a more normal rate of 7 percent, Chinese officials did not hesitate in encouraging state-owned companies and individual investors to channel their investments and savings into the stock market, leading to a massive bubble. Even when the market started to tumble last summer, the government directed securities firms and state-owned companies to keep buying.

Such policies ended up exacerbating underlying problems. Trying to micromanage stock prices was a typical command economy reflex and a grave policy mistake. Instead, Chinese officials needed to recognize that it was time to shift the economy from heavy reliance on public and private investment to a new economic paradigm, one that favors consumer spending and services. This is easier said than done because it requires a fundamental change in the mentality of Chinese officials. The change in the mindset should realize, once and for all, that the Chinese labor surplus has come to and end and that China can no longer grow by taking people off the countryside to urban factories.

The second, and perhaps more important, dimension of this mental shift is the need to stop investing in infrastructure and focus all efforts on creating more white-collar jobs by making the economy more competitive. An effective way of doing so would mean incentivizing private companies to get into industries like telecommunications and insurance, which are currently dominated by state-owned corporations.

Of course, none of this can be achieved without more transparency in the financial system. Since the Chinese fiscal stimulus began in 2008, local governments have borrowed billions of dollars to build high-speed rail lines, real estate developments and other infrastructure projects. With a housing construction boom and no corresponding level of demand, many "ghost cities" have emerged. Since most of these new investments in housing and infrastructure were financed with borrowed money, China now has a growing debt problem. Yet, since the banking and finance system is opaque, no one knows exactly the magnitude of the problem. What is known with certainty is that there are many banks crippled by bad debts.

Instead of implementing structural reforms, some Western analysts are concerned that Chinese officials will fall back on a familiar tool to aid the domestic economy: devaluing the currency, the renminbi, in order to fuel exports and reduce its imports. Such a choice would come at the expense of the rest of the global economy, which is itself not very healthy.

Unless China reforms its economy, the fear of a crash and chaotic descent will continue to spook world markets and depress global growth rates. Because China is one of the biggest consumers of energy and commodities, when its economy falters, the economies of Brazil, Saudi Arabia and South Africa also suffer. And even industrialized countries such as Germany, Japan and the United States are vulnerable because they sell manufactured goods to China, and many multinational companies have invested a lot of money in the country. Because of all these dynamics, the world economy now increasingly depends on China's willingness to reform.

EuMER TAE[currency]PINAR (Cihan/Today's Zaman) CyHAN

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Publication:Cihan News Agency (CNA)
Geographic Code:9CHIN
Date:Jan 11, 2016
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