The current global financial crisis, the most severe since the Great Depression in the 1930s, is rapidly turning into a real economy crisis and it's too early to say that the crisis has already bottomed, World Bank Chief Economist Justin Yifu Lin said in a recent exclusive interview with Xinhua.

"The collapse of the financial sector can be avoided. And the people's confidence is restoring," after the developed countries tried all out to rescue their economies, said Lin, who is also senior vice president for Development Economics at the World Bank.

The United States has committed some US$12.8 trillion, about 90 percent of the country's GDP, to save its stock market, increase investment and boost the economy, he noted.

But Lin also pointed out that focusing only on the financial crisis is far from enough because the current crisis has already turned into a real economy crisis caused by overcapacity.

Before the outbreak of the financial crisis, the US economy experienced six years of fast growth, according to Lin. A large quantity of investment was focused on real estate and the manufacturing, resulting in the problem of excess capacity. With the abrupt drop in demand, problems have arisen too, Lin said.

"With the crash of the housing bubble, wealth has decreased dramatically. The financial instruments or borrowed capital previously used to increase the return of an investment has also been reduced," Lin said, noting that as the United States takes steps to rebalance consumption and saving, consumption is unavoidably shrinking.

Although the financial markets in the United States and Europe are showing evidence of recovery, Lin is cautious about the view that the markets have reached the bottom.

Lin pointed out that overcapacity leads to less investment, which will in turn affect the starting or the profiting of enterprises. With poor profit figures and forecasts, it's hard to restore consumers' confidence and to stabilize the financial market.

"The main problem of financial market is so-called poisonous assets or bad loans, but overcapacity also increases the pressure of deflation which causes the price of assets to drop further. With the drop of market demand and enterprises' profit, there would be more bad loans," the World Bank chief economist said.

He stressed that with the intervention of US and European governments, the global financial market crash can be avoided, but whether the financial market has reached the bottom or the market has stabilized is not clear.

"The IMF forecasted that the US financial sector needed sterilizing US$1.4 trillion in November 2008, but recently IMF expanded that figure to US$2.7 trillion, and it's hard to predict if IMF will further expand the figure," Lin said.

He said that if the problems of real economy remain unsolved, it's hard for the financial sector to fully stabilize.

Furthermore, they would bring about a series of social-economic problems, such as unemployment, social unrest and so on, he warned.

According to Lin, thanks to China's huge foreign reserves, powerful intervention of financial policies, and lessons learnt from 1998's Asia financial crisis, China's economy may be the first to bottom.

But Lin emphasized that because of global overcapacity, China's export is also dropping dramatically, so the path of China's economic recovery will look like letter "W."

The growth of China's economy may fluctuate with an annual growth rate around 7-8 percent, but whether China's growth rate will restore to the two digit level of 2008 depends on the recovery of the world economy at large, he said.

"The international community is still focusing on the problems of financial markets," Lin said. "But with the deepening of crisis, the world should turn more attention to the problems of the real economy and solve the problem of overcapacity by vigorously enforcing financial policies."

During the previous G20 summits, much attention was focused on the problems of financial markets.

Although G20 calls for vigorously implementing financial policies, different countries have different interpretations of the request, Lin noted.

"I think in the next G20, more attention should be turned to the problems of real economy,” the World Bank chief economist said.

(Xinhua News Agency July 10, 2009)