US Market Withdrawal Is Risky: China Should Strive for Reform

Under quantitative easing policies, the [U.S.] Federal Reserve continues to print money to buy debt. It’s a rare regulation and control technique, and things are not going according to plan. The Federal Reserve seems to be better at increasing property value than at driving a real economy.

Recently, the Federal Reserve has become the world’s financial and economic focus. First, there is the replacement of a leader: [Chairman] Ben Bernanke is to resign, and his assistant Janet Yellen is to take his place. Second — and more important — these questions arise: Why are the Fed policies going in this direction? Moreover, how will the decision to reduce debt be realized? In recent days, the world stock market and other financial markets have all swung back and forth with this topic like buckets in a well. America’s employment data fell below par a few days ago, thus making the price of debt tumble and the stock market fluctuate. Undoubtedly, reducing debt purchases has a definite influence on the financial and capital markets and also an important influence on the world’s economy. However, one must also consider other similarly important and fundamental factors, especially that the world economy as a whole should incorporate all the big trends. We can learn from the past to accurately prepare for the future.

The financial tsunami continues to evolve from last year, and the world’s economy has developed new patterns. One such pattern is that the economies of more developed countries are likely to prosper, causing the market to place high hopes on America and Japan and to stop underestimating Europe. Although Europe is still trapped in a decline with a high unemployment rate, it seems to have already reached its bottom and is now keeping its balance, especially since its debt service rate remains at a low level, reflecting a momentary sedation in the market’s concern with a debt crisis. Japan has had a breath of fresh air under “Abeconomics,” as if to say goodbye to deflation: Its inflation rate surpassed 1 percent, and its gross domestic product for the first half of last year surpassed 3 percent, yielding good prospects for the first time in many years. America’s economic recovery is more ideal: Its unemployment rate continues to fall, and its GDP growth, beyond all expectations, exceeded 4 percent. The Federal Reserve has decided to leave the market, evidently seeing the economic outlook ahead, and the International Monetary Fund is ready to contribute to the likelihood that America and Japan will be upgraded in world economic forecasts.

Conversely, recent years have shown other emerging economies going in the opposite direction: Countries such as India, Indonesia, Brazil, South Africa and Turkey have been growing so powerful that they are causing serious problems. The fuse of this turnaround was toward the middle of the year: The U.S. Federal Reserve revealed its withdrawal from the market, washing away tons of money and also leading to emerging economies and the stock market taking a steep fall, dealing a blow to the financial system and the real economy. However, this situation also reveals all of the inner flaws of emerging economies. First are their economic structures and organizational problems, especially the lingering twin deficits that are excessively dependent on foreign investment, as well as outstanding debt. Second, many countries’ serious societal and political problems are still erupting: For each such country, the political situation is unstable, unrest is frequent, society is not at peace and the government is weak amid other [negative] circumstances — all deepening the financial and economic predicament. Hence, last year was a backward year: Developed countries remained in good positions, whereas emerging economies turned bad. So market and money flow are moving toward opportunity: The European, American and Japanese stock markets are evolving, and many markets have made history or reached a new high in recent years, whereas many emerging markets are falling. Whether this pattern can continue or will reverse in 2014 is worth investigating, but the future is still full of uncertainty.

The most obvious problem is America’s reduced debt purchases. Under quantitative easing policies, the Federal Reserve continues to print money to purchase debt, which is a rarely seen regulation technique of the past. The results are still not as envisioned, and the ability to stimulate the price of property is far greater than that of promoting a real economy. In the past, similar reduced purchases and market withdrawals were rare, so its influences are similarly more difficult to trace. On top of that, the market will certainly adjust its purchasing methods (such as when and how much to reduce) and Federal Reserve games, complicating and blurring the situation’s development. Furthermore, under long-term low interest and quantitative easing, the real economy also gradually develops an economic bubble, thanks to the stock market’s prosperous momentum and the real estate market’s receiving policy support. No one can afford anyone else’s leaving the market.

Last year was a year of muddling through difficulties and approaching stability through turbulence without erupting major crises. Whether this year will be similar is hard to predict. One sure thing is that we must be vigilant in peacetime and always strive for improvement. In the world’s main economic system, the most China can do is this: Launch an initiative to deepen reform this year. This is the most hopeful way to achieve good results.