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Government urged to brace for impact

By Fu Jing (China Daily)
Updated: 2008-09-23 15:26

A man carries a box out of the office of US investment bank Lehman Brothers, in the Canary Wharf district of London on September 16, 2008. [Agencies]

Chinese economists have urged the government to closely monitor financial risks and restructure the country's economy to better cope with possible negative impact from the worsening financial crisis in the United States.

While acknowledging that the crisis is not expected to bring about any major loss to Chinese financial institutions because of their low-level of involvement with affected US parties, a number of analysts from major think tanks have still called for measures to recover investor confidence that had plunged to its "lowest point" earlier last week.

Zhang Xiaojing, senior economist with Chinese Academy of Social Sciences, warned that the crisis in the US is "worse than what we expected" and called for counter-measures "as soon as possible".

"Our external situation has changed and we must face up to the crisis. I strongly suggest the central government closely monitor financial risks," Zhang said on Monday.

"This should be listed high on our economic agenda," Zhang said.

The credit crunch the US faces now may cause large sums of foreign capital to suddenly flow out of the crisis-hit country, Zhang said.

"China is possibly an ideal destination for investors," Zhang said. "But we should be alert of this sudden capital flow, which may threaten financial stability."

Similarly, the central bank admitted over the weekend that Chinese financial sectors have faced aggravated risks brought by the turbulence of the international markets.

Cai Zhizhou, professor with Peking University, also believed that "trying every means possible to encourage market sentiment" is the best move for Chinese policymakers.

The financial crisis has seen the US stock market falling by 20 percent. But China's stock market has plunged by about 70 percent since last year, even as its economic fundamentals were considered to be generally sound.

"This is the right time to send signals and take measures to shore up confidence and recover sentiment," Cai said over the weekend.

Cai suggested the leadership take more comprehensive measures to reform China's stock market and stabilize its development.

In this regard, Zhang applauded government measures adopted last week to recover market sentiment and maintain the stability of the stock markets - by scrapping the stamp tax on the purchase of equities and announcing its buying of shares from three major Chinese banks.

In August, the central government had already listed maintaining high economic growth and preventing inflation as its "two major tasks" in China's economic development for the rest of the year.

To further bolster market confidence, Zhang suggested Chinese financial institutions improve transparency by faithfully reporting the loss brought by their involvement with the affected US investment banks.

So far, four Chinese banks have reportedly bought assets and debt equities worth a total of $380 million from the troubled US investment banks.

"The scale is small, but they should report their losses accordingly," Zhang said of Chinese institutions.

"Transparency, at this critical juncture, means confidence."

To that effect, Zhang Bin, another senior economist with the Chinese Academy of Social Sciences, highly praised the central government's swift action to address the crisis.

"All the measures the Chinese government has taken have showed that it is a government of reason," he said.

Zhang Bin also urged the authorities to take further measures to release the potential of its domestic consumption and restructure its economy, as the US may reduce imports from China in line with expected lower consumption.

"China's export-dependent model will be challenged again if US imports from China start to decline," Zhang Bin said on Saturday.