Let's refresh our memories. Investors were pessimistic about China's overheated economy and discontented with the credit and investment-led growth model that ramped up asset prices and fueled overcapacity in some heavy industries. Then, the austerity program followed through and an orderly deceleration of GDP growth began in the second quarter of 2010. Policymakers did not get credit for bringing down inflation from 6.5 percent to 2.0 percent, but were blamed for not stimulating fast enough to the economy now.[Offshore Company Incorporation]

The Chinese government will likely deliver something soon but they are not going to be aggressive for reasons highlighted many times before. The Chinese economy is now standing at the crossroads. Authorities can choose to do things the old way or tread a challenging new path. The market, however, wants China to come up with quick fixes to pump up headline economic figures. That contradicts with the criticisms that China is not making enough structural reforms to rebalance the economy. If the stimulus pill is not strong enough after leadership transition, the market is likely to be disappointed. And pessimists will start preaching a doomsday scenario, arguing that China is not going to make it through such structural reforms.

Downsizing of SOEs

Let's look back at history and review the most recent failure of doomsday predictions on China. The most recent one was the massive downsizing of state-owned enterprises amidst the height of the Asian financial crisis by then Premier Zhu Rongji. The "iron bowl" system that was instituted since 1949 in China was never broken before. But Premier Zhu was determined to break it with the aim of improving the competitiveness of Chinese SOEs so as to prepare them for WTO accession.

There were numerous reports from prominent think tanks around the world predicting that massive unemployment in China will collapse the country. Indeed, it was a huge bet - public sector labor retrenchment led to net reduction of 43.5 million urban employees. But the issue of unemployment had not collapsed the country because housing was given out almost for free to those who lost their jobs. This strategic move served as a stabilizer. Instead, China experienced a golden decade with average GDP growth of 10.7 percent between 2001 and 2008. If you were an investor in 1998 when Asian currencies crumbled alongside the freefall of equity and property prices across Asia, it would be a dominant and rational decision to embrace the fear.

What we want to highlight is that it is human nature to resist change. Changes bring uncertainties. If Premier Zhu had not done anything to reform the SOEs and China's accession to the WTO never occurred, would the world care so much about China now? [HongKong Richful  - Hong Kong Company Formation, Offshore Company Incorporation]It is now clear that China had chosen the right path back in 1998.

Now China is at the crossroads again. The prevalence of anxiety over China is understandable given the global economy is now much weaker than in 1998. At the same time, however, China has strengthened over the past decade. And there are clear solutions to bolster the country as long as the authorities are determined enough to reform areas where weaknesses are most pronounced.

We know that the demise of western economies is not helpful to China. But we can also think of this in a positive context in the following way - "Now that the bridge (export) is burnt. There is no going back. China must develop a new growth model based on domestic demand. And the only way to move forward is through structural reforms in many areas." There are no quick fixes, but a tough external environment can in fact be catalyst for reforms.

Rebalancing economy

The idea of rebalancing the economy toward domestic demand dated back to 1998 during the onslaught of the Asian financial crisis. China saw the devastating impact on external trade: export growth in 1998 fell sharply to 0.5 percent from 21.0 percent in 1997. The idea of rebalancing was not subsequently brought to the table as Chinese exports rebounded very quickly given the buoyancy of the US economy. The European Union was relatively unscathed at that time. Instead, the merits of proactive fiscal policy to drive investment were highlighted.

Besides, the investment growth model fits well with China's political institutional arrangement. Ever since, the investment to GDP ratio has skyrocketed from 33.0 percent in 1998 to 45.7 percent in 2011. GDP growth accelerated. But the strategy neglects the cradling of private consumption.

In the past decade, China has clearly achieved remarkably in terms of growth. And it didn't come as a coincidence were it not for Premier Zhu to bite the bullet of reform and subsequently pushed the country's accession to the WTO. Inevitably, some areas could have been done better. One could argue that the authorities should have liberalized interest rates more progressively. But it is never too late if one knows the solution to a problem.

Optimism remaining

If consensus optimism remains in Asia in the long term, the implicit assumption must be the case that China adopts the right set of reform strategies to sustain growth. It is thus crucial to understand "how" China will come up with solutions to develop a new growth model. The imminent rebound of real GDP growth potentially to 8 percent in the fourth quarter of this year may appease the market for a short while but it does not say anything about the long term growth plan. We should not be constantly reliant on proactive fiscal policy and easy monetary policy. The role of fiscal policy is to arrest the fall of real economic growth during cyclical downturns. Similarly, the role of monetary policy is to anchor inflation expectations and ensure price stability in the medium term. Counter-cyclical policies should be used for that short-term purpose, not to propel long-term economic growth.[HK Corporate Registration]

Judging from China's ongoing prudence on macroeconomic management in spite of decelerating growth and falling CPI, policymakers understand what they are doing. This should be viewed as a source of comfort and reason for optimism going forward. We anticipate a clearer roadmap of structural reforms to be unveiled in 2013 and more changes thereafter.