Cheap money hurt­ing global growth prospects

China Daily (Canada) - - LIFE -

With China slash­ing in­ter­est rates for the sixth time in a year last Fri­day, it seems that ma­jor economies around the globe are con­verg­ing on mone­tary eas­ing. How­ever, cheap money, as an ex­pe­di­ent mea­sure to fight a financial cri­sis, has largely proved in­ad­e­quate to ad­dress long-term chal­lenges. An ul­tra-loose mone­tary pol­icy did not save the Ja­panese econ­omy from its lost decades nor did coun­ter­in­tu­itive neg­a­tive in­ter­est rates gal­va­nize the eu­ro­zone into solid growth.

Worse, if global pol­i­cy­mak­ers can­not promptly reach an agree­ment on how to exit from cheap money in an or­derly way, the un­cer­tain­ties caused by the on-and-off de­bate about when the United States will hike its near-zero in­ter­est rate may just be the tip of the ice­berg.

The lat­est in­ter­est rate cut shows China’s cen­tral bank is head­ing in the di­rec­tion of more eas­ing. But it does not mean that the Chi­nese author­i­ties are em­brac­ing the un­prece­dented pol­icy of zero in­ter­est rates as manyWestern coun­tries have.

Chi­nese mone­tary pol­i­cy­mak­ers are only ris­ing to the oc­ca­sion as the coun­try’s eco­nomic growth dipped to a six year low of 6.9 per­cent in the third quar­ter. The Peo­ple’s Bank of China cut its bench­mark one-year lend­ing and de­posit rates by 25 ba­sis points each, to 4.35 per­cent and 1.5 per­cent re­spec­tively, ef­fec­tive from Satur­day. By in­ject­ing some liq­uid­ity to help ar­rest the eco­nomic slow­down, China’s cen­tral bank is do­ing its nec­es­sary and con­ven­tional job.

Ac­tu­ally, the more note­wor­thy move by the PBOC last Fri­day was its de­ci­sion to lift con­trols on de­posit rates, a “sig­nif­i­cant mile­stone” in the coun­try’s financial re­form. Since China gave do­mes­tic banks free­dom to set their loan rates in July 2013, the lat­est move has made China’s in­ter­est rates ba­si­cally lib­er­al­ized.

Such a bold step for­ward in financial re­form bears full tes­ti­mony to Chi­nese author­i­ties’ res­o­lu­tion to press ahead with com­pre­hen­sive eco­nomic re­forms even as the world’s sec­ond-largest econ­omy is strug­gling with struc­tural in­ef­fi­cien­cies and ex­pand­ing at its slow­est rate since the global financial cri­sis.

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