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We Must Never Be Complacent About the Severity of the Economic Adjustment

2008/9/4 15:30:25

Talking about the stock market every day is boring. Today was a containment-relationship daily K-line; the basic analysis is the same as yesterday.

Let me talk about something else instead, which leads to the content below.

Right now, whether globally or domestically, the economy has entered a fairly significant adjustment. This point is already an indisputable reality requiring no further discussion. Economies rise and fall; tides ebb and flow—this is perfectly normal. The key problem is: how to use the best strategy to deal with this inevitable adjustment, minimizing the ultimate pain of the adjustment as much as possible, and even leveraging the opportunity to restructure the overall economy, cultivate new economic growth points, and make thorough preparations for the next round of economic expansion. To accomplish this, the foremost requirement is a fully clear-eyed understanding of the severity of the economic adjustment. Any complacency could lead to catastrophic consequences.

There is currently an extremely harmful viewpoint that since asset prices have already adjusted significantly and other economic indicators have not deteriorated further, this round of adjustment will soon pass. In reality, in any economic adjustment of significant scale, the final asset prices never just neatly return to so-called reasonable levels. Instead, they decline to deep discounts far below—just as every rise in asset prices during a bubble inevitably pushes prices to insane levels far beyond reason. The logic is the same on the way down: markets always base themselves on irrational behavior, and this irrational state is what carries the most destructive power. Any argument that asset prices have already adjusted sufficiently is never enough to declare the economic adjustment over—in fact, it often signals the beginning of an even more brutal wave of irrational decline.

Moreover, looking at the form of this economic adjustment, it has not shown signs of accelerating deterioration, but rather lingers and wavers in a state of constant hesitation. This kind of state often means greater risks lie ahead. Once this state is broken and the economy inevitably enters an accelerating adjustment, before this accelerating phase appears, any declaration that the economic adjustment has ended 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 more severe than the adjustment period itself. It is a state of grinding attrition—a borderless purgatory where despair and hope alternate. That is the most brutal phase. Whether one can endure through this period determines whether the economy can smoothly launch its next growth cycle and secure the most advantageous position. Therefore, even after the adjustment ends, one must never be complacent.

Furthermore, this round of adjustment, on a global scale, is increasingly revealing its massive scale—it could potentially be the most severe economic adjustment since 1929. This adjustment simultaneously entangles the maneuvering of various political forces and economic interests, and will ultimately determine the redistribution of global political and economic interests for decades to come. Therefore, from the level of national strategy, complacency is absolutely unacceptable. Economics has never been separate from politics, especially in this era of globalization. The old economic framework increasingly constrains economic development. How to break through, how to secure the greatest national interests in this process—that is what matters.

China certainly has sufficient resources and national fortune to occupy an even more important position in the new global economic landscape. But this is not a free lunch. This is not a pie hanging in the sky predetermined to land on China's head. To achieve this objective, any slackening is impermissible.

And China's overall economic structure is still far from a basically sound state. Within it are hidden many structural deficiencies that could seriously impede the smooth transition through this economic adjustment. To this end, vigorously adjusting the economic structure, eliminating unreasonable structural flaws, and smoothing out overall economic relationships—there is an enormous amount of work that needs to be done.

In the grand landscape of global capital flows, the complexity of this economic adjustment facing China is unprecedented. Many international factors will play roles of unprecedented magnitude. And many of these factors are not within China's sole control. Because China's sound overall economic structure has not yet been fully established, the many loopholes that exist are virtually impossible to fully guard against. Under these circumstances, non-systemic risks exist at all times, and this is the most difficult to manage.

To deal with such a complex situation, watching and waiting, hesitating, going with the flow, or sitting idle and awaiting one's fate are all dead ends. First, a clear adjustment strategy must be established so that the adjustment is completed at the lowest possible cost. Then all available resources must be mobilized to ensure the adjustment proceeds within a controllable range. And China's current economic state absolutely has the capacity to achieve this—it's just that the window of opportunity must not be missed, or the price will be extremely steep.

There is every reason to believe that China after the storm will be even stronger. But the current question is: we must first safely and smoothly weather the storm. Otherwise, endlessly nattering about "after the rain comes the rainbow" is utterly meaningless. And the storm—the real storm may not have truly arrived yet. Have we already made sufficient preparations?