The unusual significance of 2008, the Year of the Rat, lies in the fact that the year marked many milestones and major events, especially in China where many unforgettable events unfolded. But more importantly, 2008 was a tipping point or a historical inflection. As China commemorates the profound social and economic changes that began 30 years ago, many other future changes will be traced back to 2008.

For many Chinese, the snow storm disaster in southern China earlier in the year had a profound impact. In fact, some superstitious Chinese cautioned long ago that 2008 would be a year of troubled times. We have seen structural contradictions, institutional constraints and macroeconomic policies that have been alternating amid China’s swaying economic growth. The financial tsunami which stemmed from the US subprime mortgage crisis and the resulting global economic slowdown are taking a toll on a Chinese economy that had already shown signs of sluggishness.

A look-back at China’s macroeconomic policies in 2008 might suggest the following: trying to prevent the overheating of local economic growth during the first quarter; attempting to curb inflation in the second quarter; ensuring a specific pace of economic growth and reining in inflationary pressures during the third quarter; taking measures to counter the external shocks of the financial crisis with GDP growth target slipping to 8% from 10% in the fourth quarter.

We have noted that the central government has continuously rolled out policies and measures aimed at easing the risks and pressures weighing on economic growth. It has proactively responded to the global economic turmoil. The timely policies and measures (of such a concentration and diversity rarely seen over the years) are worthy of recognition. However, economists are more concerned about whether some of these aggressive policy measures will conflict with each other or generate undesirable side effects, and thereby actually undermine the economy they are supposed to be aiding. And with so many government policies and measures now implemented, how can one identify exactly which ones are most effective?

I would like to see the policies and measures introduced in a more organized manner and at certain intervals, since it takes time for any policy to have an effect. Dealing effectively with the biggest economic meltdown in five decades requires not only quick and aggressive responses, but also a prudent, rational and targeted approach.

Based on the data available, no one is optimistic about the upcoming first quarter of 2009. A global economic recession would have a negative impact on China’s economy and even social order. Therefore, I would characterize the Year of the Rat as an “inflection point” and would forecast no bull runs in the Year of the Ox. It seems somewhat pessimistic, but despite a flurry of government policies and stimuli, there is little to indicate that 2009 will see improvement in the stock market and the housing market. Periodical rallies and rebounds are likely, but the overall downbeat trend will not be reversed for some time.

I am more worried about the survival and development of small and mid-sized enterprises (SMEs), as well as the extremely grim job market. The bankruptcies of many SMEs located in the Pearl River Delta and Yangtze River Delta in 2008 reveal the shaky foundations of many privately-run SMEs. More specifically, the tax burden (average total tax rate ranging from 40% ~ 60%) on local SMEs is among the world’s highest. The steady rise in labor costs in recent years has further reduced profit margins that had already been squeezed by elevated corporate taxes. The new Labor Contract Law raises doubts about legislative over-protection of labor rights while neglecting interests of employers. The marked decline in exports stemming from the world economic recession has put even more pressure on smaller export-oriented OEMs. With razor-thin profit margins, the vast majority of SMEs in the private sector are actually unable to expand investments in R&D, let alone invest more in human capital. The enterprises that have always relied on the low-cost labor strategy have gradually lost competitiveness in international markets.

Taking into account the jobs generated by SMEs, one can imagine that as the economic recession deepens, the SMEs that have recruited a large number of relatively low-skilled laborers in better times would be forced to significantly cut staff numbers. The alternative is a string of bankruptcies that would cause massive concentrated job losses. These unemployed people may then fail to find suitable jobs in a short period of time, and may not have sufficient capacity and time for the skills training programs that are aimed at preparing them for new industries or new jobs (with the exceptions of simple physical work).

For people with higher educations, especially college graduates, further additional investment in education or training might be a wiser choice during the economic downturn as the opportunity cost for them to take further education or specialized training would be significantly reduced. In addition, a number of years in continued education may create more opportunities for development for them and, thus, better compensation after the recession.

Therefore, the government could consider reengineering or overhauling its tax systems for both businesses and individuals, and therefore significantly reducing their tax burdens. In addition, it could force monopoly industries and enterprises (such as China Mobile, China Telecom, China National Petroleum Corporation, Sinopec, Gehua Cable TV Network, etc.) to introduce more aggressive price-cutting to stimulate consumption. It could also scrap most highway tolls within three years to reduce business and personal transportation costs, thereby enhancing the operational efficiency and value of highways.

The Year of the Ox may not be bullish, but China’s economic growth is still likely to remain above 7%, a relatively high level, and still with considerable room and opportunities for development. We can be prudent and rational by fully factoring in the risks and uncertainties, but must not lose confidence and hope. As long as we respect the rules of the market economy and the principle of rule-of-law, and consider all options and opportunities, we will be able to overcome the challenges that lie ahead. This will empower China’s economy to ride out the devastating global economic meltdown relatively unscathed.