What's needed for building a new economic order

The best strategy is balance and compromise, according to ancient Chinese philosophers. Even a good thing will turn bad if it is overdone.

First, it's the balance between saving and spending. I always tease my American friends. I say, “You guys borrow tomorrow's money and spend that today; we Chinese save today's money for tomorrow. That's why you have a financial crisis.”

Actually, I think we need to strike a balance between saving and spending. Easterners should save less and spend more, while the Westerners should save more and spend less. Then, we will achieve a better balance.

We have to balance domestic demand with exports. Countries in the East have to change their economic growth model, from export-oriented to domestic consumption-oriented.

This is not an easy transition however, as the most important thing is to increase the purchasing power of the people. In this case, we need to do a lot of things, including raising employees' salaries and other benefits. We need to build up credit systems so as to raise the purchasing power of the people.

People say the easiest way is to just let the renminbi appreciate. I don't think so, because the consumer goods portion of our imports accounts for less than 20 percent. Increasing the exchange rate only affects international purchasing power. What we need to do is increase the domestic purchasing power.

We also need to balance financial innovation and financial supervision. As you know, financial derivatives represent a double-edged sword. On the one hand, they can mitigate financial risks. On the other, they can be used as a tool for speculation.

So, financial innovation and financial supervision are mutually supplementary, and also mutually restricting. In this case, we need to encourage financial innovation, even as we prevent over-speculation in the financial derivatives market. Specifically, I think we need an international effort aimed at preventing over-speculation in financial innovation.

And then there is balance of the fictitious economy and real economy. The real economy is mainly based on tangible resources, while the fictitious economy is based on intangible resources, mainly, credit systems.

We need to balance these two, not only by making money through high rates or return. These high rates, on the one hand, mean high efficiency, so you can borrow others' money and use it to make more money. But on the other hand, it also means high risk. If your return is one percentage above the interest rate, you will gain. But if it's lower than the interest rate, you will be in trouble.

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