THE world economy is confronted with three types of dilemma.

The first is a structural predicament.

At a time when the dividends of globalization, natural resources and demography begin to decline, will China's export-oriented growth model, already groaning under existing economic arrangements, face an ever bigger challenge?

The second dilemma is a cyclical one, characterized by the real economy's narrower profit margins, financing difficulty and reluctance to invest. Meanwhile, the virtual economy is plagued by sloshing liquidity, marked price distortion and heightened speculation.

Although excessive liquidity is but a by-product of pre-bust bubbles and post-crisis bailouts, a great amount of financial and industrial capital has flown, instead of to the real economy, either to the global commodity market, the volatile financial market or emerging markets in search of hedging gains.

Speculation considerably drives up the cost of economic recovery and worsens market climate. China, in particular, faces the paradox of a "cash glut" and a "cash famine," that complicates macro-economic policy-making.

With respect to this situation, the economic conference of the Party's Central Committee that ended last December decided to reduce the tax burden for business and boost fiscal spending on general welfare, so as to rev up corporate investment and household consumption.

It was also agreed at the meeting that the government is to raise the efficiency of monetary policy and rein in asset bubbles, so that money will leave the overheated virtual economy in favor of under-funded real sectors.

The third of China's economic dilemmas originates from outside the country.

All national governments, in reacting to their structural imbalances, have adopted stimulus packages to varying degrees of intensity. But compared to others, developed nations of reserve currencies suffer a far smaller impact of the liquidity they pump into their economy than others.

Their abuse of monetary dominance engendered protectionist policies and parochial demands for bigger market shares in emerging economies.

This approach adds to the complexity of the world economy and poses tremendous challenges to manufacturing powerhouses like China.

The most intractable of all consequences is imported inflation, reflected by commodity prices and wild fluctuation in money supply caused by quick entry and departure of flight capital. These forces have vastly undermined China's macro-economic control to keep the yuan stable and generate growth and jobs.

Therefore, we need to realize that if the imbalanced growth pattern collapses globally, all the three dilemmas will complicate and compound each other. This is a scenario we must preempt, preferably through institutional reforms that stimulate market vigor.

Hollowing-out

At the Party's conference in December the economic leadership vowed to rise to external challenges and overhaul the growth model.

Prevention of systemic and regional financial crises was made an imperative that merits paramount and immediate concern. This decision is based on following considerations.

First, excessive liquidity, resulting from Western desperation to head off a hard landing, can only be absorbed by a real economy revived on the back of generous financial support.

Second, with sound development of the financial system, industrial capital avoids being displaced by speculative capital amid a cyclical downturn. Otherwise, China's economic prowess accumulated over the past 30 years is in for an irreversible industrial hollowing-out.

Third, we need to manage a dynamic equilibrium between financial efficiency and stability, and also between financial innovation and regulation.

We ought to sharpen the core advantage of China's finance, by devising a more efficient monetary policy and raising the consistency of wealth management. Without these measures, Chinese finance is vulnerable to manipulation, and de facto unequal trade regimes will inhibit the wage growth and fair redistribution of wealth in China.

Notwithstanding the scale and scope of Chinese finance today, China lags far behind developed nations in terms of the ability to provide financial services with high-added value.

The meltdown sweeping the West originated from unregulated derivatives gone wrong, while China got entangled as well because it was woefully lacking in derivatives.

The official vision for Chinese finance is that it must develop in a way to contribute to an economy in transition and the country's better place in the global value chain. It can contribute in following ways.

Entrepreneurial finance

First, awash in top-notch financial talent and expertise in its first-tier cities, China may well establish its equivalent of the "entrepreneurial finance" common in Silicon Valley.

In this model, financial gains stem from hefty yields on investments in startups. The mere expectation of the funded parties' profitability cannot underpin continued market booms.

Currently, private equities and stock exchanges like Nasdaq don't fund businesses until they are sure they can profit, leaving startups in the lurch. That's where "entrepreneurial finance" needs to come in.

Second, the cooperation between private and public companies and shadow banks should be strengthened to grow the kind of "supply chain finance" popular in South Korea, where big corporations, rich in collateral, take out cheap loans for their smaller suppliers and secure orders for them. We may also learn from Germany's example. German banks offer differentiated and tailored services to clients, which is a secret of German manufacturing's vibrancy amid intense global competition.

German banks seldom wage price wars to steal rivals' clients. A strong bond of trust exists between them and their partners. Both South Korean and German practices are worth emulating if China is to help its cash-strapped private firms, thereby deflating the asset bubbles fueled by shadow banking.

Third, on the basis of revamped mechanisms involving incentives and risk control, China may consider creating financial entities that primarily service the public.

Before the bust in 2008, US consumers spent beyond their means on anticipation of real estate appreciation.

By contrast, increased pay of Chinese wage-earners has led to more wealth accretion than real consumption.

Which means, Chinese citizens' buying power cannot be fully tapped in the absence of policies to free up some of their investment money.

Fourth, as diverse as the aforementioned financial strategy is, it should aim at encouraging Chinese firms to go global and assisting Shanghai's bid to become a financial center. In this way China can make better use of its massive foreign exchange reserve and inflows of foreign capital.

There are caveats, though. We cannot risk significant appreciation of the yuan and a fully open current account to make the currency more widely recognized globally. Japan's yen and euro's ups and downs have a bitter lesson to teach us about the danger of imprudent, hasty financial liberalization.

Finally, there is the choice of "government finance," to search for worthy, lucrative investments for social security funds and shrinking forex reserve.

My favorite would be government-issued bonds that fund urban infrastructure and high-tech development.

Through trusting qualified financial professionals with the fund's management and beefing up regulatory oversight, many preoccupied yet cash-starved local governments can hope of having more funds at their disposal. In so doing, however, they need to beware of incurring heavy debts and breeding corruption, which often go hand in hand.

The author is executive dean of the School of Economics at Fudan University. The views are his own. Shanghai Daily staff writer Ni Tao translated his article from Chinese.