BEIJING: New Economy euphoria is gripping China. Cell phones seem as ubiquitous in Shanghai as in Helsinki, with dot com firms as common as in San Francisco. Although the term “irrational exuberance,” once applied by America’s central banker Alan Greenspan to the US stock market, does not apply here, the rush into New Economy investments, with even the prospect of a Chinese NASDAQ in the offing, has rejuvenated China’s economy. As China embraces the new, however, its old industries are coming under enormous pressure.
Coming just a few years after Asia’s financial panic, China’s euphoria is surprising. The government seems to be embracing the New Economy as a means to immunize China against future crisis. This is wishful thinking. No one should expect that a single crisis can burn away all of a country’s economic weeds, nor that the New Economy is a magic bullet for risk-free growth.
Over the past two centuries the developed world experienced periodic booms and busts on its way to prosperity. Those crises purged economies and societies of inefficiencies and helped improve their core institutions. The miracle of East-Asia (including China) over the past 30-40 years was not high growth alone but the fact that robust long term growth came about without inciting any major crisis. Asia’s financial panic of 1997-1999 was a first for the region - which is why it stunned everyone - but it won’t be the last. Despite all the hype, the New Economy cannot vaccinate a country from tumult.
So, in the wake of New Economy euphoria, are China’s technological ambitions and current growth rates sustainable? Like some other Asian economies, China saw strong growth in the first half of 2000. GDP grew by 8.2%, higher than last year’s 7.4% for the same period. Moreover, three years of price deflation - which began during the financial crisis of 1997 - may be at an end. As in America at the beginning of its boom, however, the key to continuing growth is sustained investment and improved productivity.