China's latest economic data seems to suggest the government has more room and immediate need for policy easing.
The consumer price index, a gauge that top policymakers are paying special attention to, eased to 4.1 percent, a 15-month low, in December. The stubbornly high inflation that haunted China for most of last year is no longer such a big problem. In that case, the country should have the flexibility to resort to a greater loosening of policy.
A loosening seems imminent. The new export order index for December stood at 49.8, a figure indicating global demand for made-in-China products is shrinking. China’s foreign exchange reserves dipped to US$3.18 trillion at the end of last year from $3.2 trillion at the end of September, which, though slight, marks the first quarterly decline in more than a decade. Some analysts said it was a sign underscoring the need for the country to shore up market liquidity. In a broader picture, growth in gross domestic product in the fourth quarter of last year slowed to 8.9 percent.
Outside China, international rating agency Standard and Poor’s recently downgraded the sovereign debts of France and eight other eurozone nations, suggesting the European debt crisis is far from over. A recession in Europe is bound to weaken demand for Chinese goods and deter European companies from increasing their investment in China.
All these factors suggest that the world’s second-largest economy is facing greater risk of a slowdown in growth, and hence, threats to employment and social stability.
Apparently, China’s policy has shifted to focus on economic growth instead of the fight against inflation of the past few months. To stimulate growth, the reserve requirement ratio for lenders has been cut to allow banks to have more money to lend. And now, some analysts even suggest that a reduction of interest rates is needed to spur economic growth further.
Although the reason for a greater easing of policy may be valid, the need to cut the interest rate does not appear to be equally solid.
First of all, China has a lot of other tools at its disposal if it wants to stimulate economic growth, with an interest rate reduction at the bottom of the list.
The People's Bank of China can continue to cut the required reserve ratio for banks and increase their lending quotas, among many other measures, to boost liquidity in the financial markets.
Even in a worst-case scenario, the country has the financial brawn to roll out substantial stimulus packages, similar to the raft of incentives worth 4 trillion yuan launched in late 2008, to boost spending and investment.
An interest rate reduction may also not be that necessary from a governance point of view because of its across-the-board effect on all industries, a one-size-fits-all move that may benefit some but pose risk to others.
Reducing the interest rate will give a lift to the property market. Such reduction will also be regarded by speculators in the sector as a decisive sign of a government turnabout in monetary policy. Based on such perception, they could stoke up speculation in both the property and stock markets that might result in asset bubbles and block the flow of liquidity into industries that really need the funds most urgently.
Indeed, capital support should be given to real industries such as manufacturing and export companies. Those industries, regarded as stabilizers in the event of a financial crisis, create more jobs than property and stock markets do, and they deserve government backing, especially in difficult times.
China should not rely too much on interest rate moves. Instead, the country should learn to roll out varied measures under a flexible policy depending on the needs of the different industries.
Judging from the present economic trends, the tightening stance must be maintained on the stock and property sectors. The loosening should be applied on rules for the manufacturing and export industries, while the technology and new energy sectors deserve a proactive monetary policy.
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