China the Key to Preventing ‘Lost Decade?’

Many market experts and economists are saying that the world has avoided the next Great Depression, but concerns still abound about how long negative or slow economic growth will continue.

Germany, France and Hong Kong moved out of recession last quarter, but the dollar is still susceptible to any weekly indicator that misses economists expectations.

At the World Capital Markets Symposium in Kuala Lumpur, Malaysia experts weighed in on what could prevent global economic stagnation turning into a “lost decade” that Japan experienced, with no growth, even with near-zero interest rates.

Quite simply, if China can get its consumption up and stop needing to export so much capital a lot of other things will fall into place, Princeton University economist professor Paul Krugman said.

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Major saving counties like China and oil-exporting countries can change the current scenario by turning $1 trillion of savings into demand and a full global employment picture, Krugman said.

“If we don't see China finding a way to transition to from this very effective short-term stimulus to a long-term higher level consumption, then we have a lot more reason to think that we might be looking at a lost decade of the world as a whole,” he said.

China is becoming a major part of the world economy, adopting the rules of international institutions and is a player in the G20, and now has a question of what to do with its reserves, Laura Tyson, economist and presidential advisor, said.

And any ideas of policies that could try to contain China won’t help the global situation, Tyson said.

“If you look at the numbers by 2020 any reasonable estimate has real (gross domestic product) and purchasing power parity (with the U.S.),” she said. “So the question is what kind of new institutions, what kind of new cooperation forms, what kind of new bargains do you strike?”

Teh Kok Peng, president of GIC Special Investments, made the case for “boring leadership.”

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The U.S. has overdeveloped financial systems and China has underdeveloped financial institutions and there needs to be a move from Wall Street powerhouses to boring banks that existed in the U.S. in the 1980s.

And Andrew Sheng, of University Malaya and Tsinghua University noted that China may spend big, but that may not be reflected in the normal measure of GDP.

“The old model is really broken in my view cannot be sustained,” Sheng said. “We need to change this and we all want to see a better greener world and my experience in working in China they have woken up to the fact that they need to spend money on health care, on education on energy efficiencies. But you won’t get there overnight, that’s the dilemma and in between what we might see is that actually some slowdown in the traditional way of calculating that kind of growth.”