The Chinese government’s pledge to prevent a “hollowing out” of the nation's industries is indeed a move in the right direction, as real activity has shown signs of weakening amid bubbles in the world’s second-largest economy.
Speaking at the end of the two-day National Financial Work Conference on Saturday in Beijing, Premier Wen Jiabao said: “In the future, China will stick to the principle of letting the financial industry serve the real economy to prevent virtual bubbles from inflating the economy.”
"The country must resolutely curb the flow of funds from the real economy to a virtual economy where capital is used for speculative gains. We must check the growth of a bubble economy and prevent industries from hollowing out,” the premier said.
Those remarks are excerpts from a statement released by Xinhua news agency after the conference. And they appeared immediately after Wen summarized the achievements and problems of China’ financial work in the past five years.
The pledge to support real industrial activity and curb financial bubbles is not new, but this is the first time that the top Chinese leader has given the matter such prominence in any of his speeches.
In fact, Wen implied that it was the guideline and the goal of how China’s financial industry should involve, as he mentioned this ahead of eight specific tasks for the industry for the next five years. The National Financial Work Conference has been held every five years since 1997.
What Wen said at the conference indicates that top Chinese policymakers have been aware of the threat of the excessive speculation that has haunted China’s financial market.
Indeed, China’s strong growth in the past five years was largely attributed to asset bubbles instead of the progress of its real industries. Stock and property markets, expanding on excessive speculations, boosted the GDP growth, while real industries, notably manufacturing and export businesses, failed to upgrade with the times.
That is a dangerous trend, and there are many examples how an economy, once appearing strong and thriving, nosedives quickly after its real industries fail to grow on par with the financial sector.
The 2008 financial crisis was a result of that. Prior to the crisis, the United States enjoyed bullish stock and property markets, posting handsome economic data as a whole. But its real industries, of which the manufacturing industry is a big part, were snail-paced in terms of both scale and quality. An industrial hollowing-out -- which saw investments in industries such as manufacturing continuously flow out of the country -- took shape.
In those years, Wall Street took the luster of Detroit, the symbol of the US manufacturing industry, and became the pillar of the world’s largest economy. However, when the credit crunch broke out, the economy suddenly lost steam. Even though the US government brought interest rates to historical lows to boost liquidity, the move did not work simply because people holding capital found no avenues to invest as the stock and real estate markets were finished.
The Chinese economy has shown signs of a similar hollowing-out.
The massive bankruptcy of small- and medium-sized enterprises in Wenzhou, in East China’s Jiangsu province, in the second half of last year, is a signal that the manufacturing sector has been pushed to the sidelines. Business owners cannot stay afloat because they are not able to secure sufficient funding due to tightening policies. For years, Chinese lenders had the habit of lending to homebuyers and stock investors for quicker and higher returns. The manufacturing business owners were not their top clients.
Investors also tend to put their money into stocks, property, commodities and artwork – investments that allow them to book profits by simply speculating and quickly flipping the assets.
If that trend continues, real industries will gradually flow out of China and lead to the hollowing-out.
That will be a sad story. Countries with a strong manufacturing business will have the ability to mitigate any economic turmoil. That is why Germany was the first Western economy to have walked out of the shadow of the 2008 financial crisis and remain in good shape despite the sovereign debt woes elsewhere in the region.
If China, a manufacturing powerhouse, fails to curb the financial bubbles and return to the roots of the real economy, it can hardly avoid the pain suffered by many developed economies.
Full content of EJ Insight is available at www.ejinsight.com. Copyright Hong Kong Economic Journal Ltd. Republishing and editing are forbidden without authorization from Hong Kong Economic Journal. If there are any questions, please contact Chris Yeung (chrisyeung@hkej.com) for editorial matters and Margaret Lor (margaretlor@hkej.com) for sales and marketing matters.
