The Severity of the Economic Adjustment Must Not Be Taken Lightly

Author: [Site Administrator]
Source: [Fund Analysis]
Article type: Regular article
Published: 2008-9-18 8:22:18
Column: Expert Perspectives

Now, whether globally or domestically, the economy has entered a fairly significant adjustment. This is an indisputable reality that requires no further discussion. Economies rise and fall, tides ebb and flow — this is perfectly normal. The key question is: how to respond to this unavoidable adjustment with the best possible strategy, minimizing the ultimate pain, and even leveraging it to restructure the overall economy, cultivate new growth engines, and make thorough preparations for the next round of economic expansion. To achieve this, the foremost requirement is a fully clear-headed recognition of the adjustment's severity. Any complacency could lead to catastrophic consequences.

There is a currently extremely harmful viewpoint that since asset prices have already fallen significantly and other economic indicators haven't further deteriorated, this adjustment will quickly pass. In reality, in any adjustment of meaningful magnitude, asset prices ultimately don't just return to so-called reasonable levels — they discount massively below them. Just as any upward wave of asset prices always hurls prices far beyond reasonable levels into frenzy territory, the same logic applies on the way down. The market's foundation is always irrational behavior, and this irrational state is the most destructive. The argument that asset prices have already fully adjusted can never prove the adjustment is over — and often signals the beginning of an even more brutal irrational decline.

Furthermore, from the standpoint of trajectory pattern, this adjustment has not yet shown an accelerating deterioration phase. Rather, it has been wavering in a state of hesitation. Such a state often signifies that the greater risk is still ahead. Once this state is broken and the economy inevitably enters an accelerating adjustment, before such acceleration appears, any assertion that the economic adjustment is over is suspect.

More importantly, after every major economic adjustment, there is always a long recovery period. The destructive power of this recovery period is often even more severe than the adjustment period itself. It is a state of grinding and attrition — a boundless, agonizing alternation of despair and hope. That is the most harrowing part. Whether one can endure through this period determines whether the economy's next growth cycle can smoothly launch and occupy the most favorable position. Therefore, even after the adjustment ends, one absolutely must not let down one's guard.

And this adjustment, on a global scale, increasingly demonstrates its magnitude — it may even be the most severe economic adjustment since 1929. Moreover, this adjustment is simultaneously entangled with the gaming of various political forces and economic interests, ultimately determining the redistribution of world political and economic interests for the coming decades. So from the standpoint of national strategy, there is absolutely no room for complacency. Economics has always been political, especially against the backdrop of globalization. The old economic order increasingly constrains economic development. How to break through, and how to secure maximum national interest in this process — that is the key.

China of course has sufficient resources and national fortune to occupy a more important position in the new world economic order. But this cannot be obtained without effort. This is not a pie hanging in the sky that is guaranteed to fall on China's head. To achieve this objective, any slackening is unacceptable.

Moreover, China's overall economic structure is far from reaching a basically sound state. Within it lie many structural deficiencies that could seriously impede a smooth transition through the economic adjustment. On this front, we must vigorously adjust the economic structure, eliminate irrational structural flaws, and rationalize overall economic relationships — there is an enormous amount of work to be done.

Standing in the grand landscape of capital globalization, the complexity of the adjustment China's economy currently faces is unprecedented, with many international factors playing an unprecedented role. Many of these factors are not within China's control alone. And because China's complete economic structure has not been fully established, the numerous vulnerabilities within it are virtually impossible to defend against completely. Under these conditions, non-systemic risks exist at all times — and these are the most difficult to control.

To cope with such a complex situation, observation, hesitation, drifting along, or sitting and waiting for doom are all dead ends. We must first establish a clear adjustment strategy to complete the adjustment at the lowest possible cost. Then mobilize all resources to ensure the adjustment proceeds within a controllable range. China's current economic state is fully capable of achieving this — the key is that the window of opportunity must not be missed. Otherwise, the price would be extremely steep.

There is ample reason to believe that China will emerge from the storm even stronger. But the current question is: we must first safely and steadily weather the storm. Otherwise, merely repeating "after the storm comes the rainbow" is utterly meaningless. And the storm — the real storm — may not yet have truly arrived. Are we sufficiently prepared?