China's achievements in the last 26 years through reform and opening-up are well documented. During this time though, there have been some problems with the structure of the Chinese economy and the most obvious sign of this was the double surplus.

The 15 consecutive years of double surplus can be attributed to various shortcomings in the system, price errors and imbalanced macro-controls. As the world's third-largest net capital exporter in the world, China's investment benefit has always been negative except in 2005. As a net capital importer (with considerable debt), US investment benefit has always been positive. It is worth thinking about.

In fact, China, which ranks 128th in the world in terms of per capita income, gives billions of dollars worth of subsidies to the US every year. In the long term, with the increase of foreign capital, the benefits of foreign investment will actually be lost, forcing China to expand its trade surplus to maintain a balance. The gap between China's GNP and GDP would grow bigger and bigger.

A time will come when more discussion is needed about whether the export model for processing trade and the participation model for international division of labor are effective paths for industrial upgrade in China. The increase in foreign exchange reserves has made it increasingly difficult for the central government to tighten monetary policy. China's foreign exchange reserves are approaching one trillion US dollars. Owing to an increase in deficit, the US dollar has been undergoing 'strategic devaluation' since 2002. If the dollar depreciates too much, China's foreign exchange reserves will shrink in value substantially. China must introduce measures to correct the situation as quickly as possible. Of course, China shouldn't rush its fences.

Policies that would correct the situation and slow the growth of China's foreign exchange reserves include the following: increasing public expenditure on social security, medical care and education in order to reduce the uncertainty of the future as this encourages people to spend rather than save; narrow the income gap between rural and urban areas as well as different regions.

Reform needs to be made to the domestic financial market as well as investment and financing systems so that domestic savings are directed into investment. The exchange rate of the RMB to the US dollar should be set by the market. Both domestic and foreign enterprises should be treated equally. Preferential policies for exports should be cancelled. Preventative measures should be introduced to stop local governments competing for Foreign Direct Investment (FDI). The local government should also be banned from using the introduction of FDI as part of the political performance criteria for local officials. The target for new FDI set by the central government should be cancelled too. The commodity price system needs to be reformed too so that the scarcity of goods is reflected in the price. Governments at various levels should have an emergency policy in preparation for adjustments to China's business structure, keeping shocks to social and economic stability to a minimum. Capital controls should be relaxed, but the method used to control the inflow of investment capital should not be abandoned. Public listing by domestic companies should be discouraged and joint-ventures with foreign companies should use the domestic market to co-finance. The rules of the WTO must be kept, but foreign capital should be limited to certain industries. The central government should increase public expenditure to support enterprises.

Many people worry that RMB appreciation and reduction of trade surplus will affect employment rates. However international precedent shows that the major factor affecting employment rates is economic growth.

In fact, employment rates may drop in a year when net exports increase, because economic growth happens so fast. The appreciation of the yuan may affect export companies and the less profitable of those would perhaps face bankruptcy. But this is what China wants. The issue of regional unemployment can be easily resolved with high economic growth. Micro or slow readjustments are good, but harm may be done if they are insufficient to turn around the general trend of deterioration. The continuous inflow of foreign investment may cause bubbles in development, and the space the Chinese economy has to develop will be gradually used up.

The Chinese economy is in a new stage of development. To improve further China has to readjust its strategy for development and economic mix. The point of 'opening-up' is to improve the efficiency of resource distribution in China, and only by doing this will the Chinese economy be sustainable. As a developing country, China should not always seek a trade surplus. The inflow of FDI should be turned into a trade deficit. The double surplus in China reflects the imbalance of the economy. As the imbalance is already there, it is would be hard to correct the problem in a short period of time by with adjustments to macro controls. China has to readjust policies that attract foreign investment, foreign trade and industry and speed up the process of becoming market-oriented. Macro economic policy should be implemented in combination with these changes.

Editor: Yan