Raghuram Rajan, former Governor of the Reserve Bank of India, professor at the University of Chicago Booth School of Business and chief economist of the International Monetary Fund (IMF), proposed the concept of economic "fault line" in his book "Fault Line". This "fault line" concept was borrowed from geology to analyze financial crises and impacts. Fault line in geology refers to the fracture formed by the crustal tectonic plates collapsing and colliding with each other on the surface of the earth's crust; earthquakes often erupt along fault lines, so tracing along the fault line can provide us a new perspective for grasping the financial crisis and its evolution.
Rajan proposed four levels of fault lines. The first level is the increase in inequality that has boosted the development of housing credit, the growing income inequality and the pressure of credit. The second level is that the country adopts an export-oriented economic strategy and relies excessively on foreign markets. However, the policy of emphasizing on exporting while paying lesser attention to consumption is difficult to maintain for the long run. When the government is aware of the problem, it might be difficult to reverse the situation. The third level is the source of collisions between different types of financial systems. The fourth level is the economic recovery but at the same time maintaining the danger of high unemployment rate, which has weakened the proactivity of the private sector, especially in the financial industry.
If we look at China with the framework of "fault line", the fault line of the Chinese economy may already begin to appear. This fault line occurred during the transition from an export-oriented economy to a domestic consumption economy. In the context of the highly developed export-oriented economy, due to long-term and excessive dependence on foreign markets, domestic consumption capacity in China is low, and innovation capacity also appears to be insufficient. When the export-oriented economy is difficult to maintain, various problems will surface.
The second level of fault line has already appeared in China, and there is still the possibility for the fault line to deepen. In the past, China chose the export-oriented growth path, and domestic household consumption accounted for a much lower share of national income than the world average. Before China's export-oriented economy had the time to complete the transformation and upgrading, tremendous changes in the international market happen. The global financial crisis has hit the external market, while the U.S.-China trade frictions have intensified, which has changed the external environment for China's development. At the same time, it is difficult for China's domestic household consumption level to increase rapidly. On the one hand, Chinese households have to spend a lot of money on medical care and education, and they need a lot of savings for social security. On the other hand, China's rapid urbanization has boosted the real estate prices, and emptied the wealth accumulated by Chinese households for long-term savings, which has greatly reduced the household disposable income. If the transition from an export-oriented economy to a domestic demand-based economy, and from an investment-oriented economy to a consumption-oriented economy cannot be carried out smoothly, it would be easy for economic fault lines to occur.
So how can China avoid the economic fault line? Or how does China cross the economic fault line?
The economic fault line is actually the result of structural changes in the economy and the market system; it is a systematic result. To change the system results, the solution definitely cannot be dependent on a single factor; rather systematic change must be made. In other words, the domestic system needs to carry out systematic reforms in several areas. First, the direction should be market-oriented and there must be internal deepening reforms. Under the comprehensive negative list management, market access should be largely liberalized to attract private and foreign capital to realize the market as the decisive force of resource allocation. At the same time, there should be deepening reforms of state-owned enterprises to avoid state-owned enterprises becoming the obstacles to China's market-oriented reforms.
The second is China should insist on and expanding its opening up. China should not give up the opening-up because of the economic and trade frictions started by the United States. As the largest beneficiary of globalization in this century, China must continue to participate in and maintain the globalization process and continue to integrate into the global market through opening up. In fact, China's responsibility for the world as a major power is manifested in the maintenance of the globalization system.
The third is to firmly promote the rule of law and make the Chinese economy trusted by domestic and foreign capital. The most important manifestation of the rule of law is the protection of property rights, including the rights of private property and intellectual property rights, while limiting the role and intervention of the government, thereby balancing the "hands" of the government and the "hands" of the market.
The fourth is to improve the market system and optimize the business environment. Reforming and perfecting the market system is the best institutional arrangement to encourage consumption, protect consumers and investors. Optimizing the business environment is to develop the necessary environment to encourage enterprises to develop, form healthy competition and improve investment efficiency.
Concerning China's future reforms, it is not necessary to propose any new concepts. China's reform and opening up has gone through a fruitful and successful 40 years, and it will continue to tread this path in the future. The 3rd Plenary Session of the 18th Communist Party of China Central Committee and the 19th National Congress have already identified a specific list of tasks for China's deepening reforms. What is needed now is to implement these established reform arrangements.
Final Analysis Conclusion:
Under the influence of various internal and external factors, the transformation of China's economic structure is forming an economic "fault line". Only by systematically promoting internal reforms, opening up to the outside world, developing the rule of law economy, and perfecting the market system will make it possible for China to cross the fault line of the economic restructuring.
