It’s time to end alchemy of cheap money

China Daily (Hong Kong) - - VIEWS -

Af­ter a year-long pause, the US Fed­eral Re­serve fi­nally raised in­ter­est rates on Thursday. The glacial pace at which the Fed raises rates is no cause for op­ti­mism. And although the in­creas­ing dis­rup­tion US pres­i­dent-elect Don­ald Trump is ex­pected to cause around the world should make such a cau­tious ap­proach a virtue, its un­der­pin­ning il­lu­sion that cheap money can save the world economy from the dire con­se­quences of the global fi­nan­cial cri­sis, which spread from the United States in 2008, has long im­peded painful but nec­es­sary struc­tural re­forms.

If the world economy is to get back on the track of sus­tain­able and in­clu­sive growth, pol­i­cy­mak­ers across the world have to take con­crete mea­sures to re­place pain-killing cheap money with pro-growth struc­tural re­forms as quickly as pos­si­ble. So, the way the US and China, as the world’s two largest economies, will lead by ex­am­ple in pi­o­neer­ing new growth pat­terns will largely shape the fu­ture of the world economy.

With all three ma­jor US stock in­dexes hit­ting record highs re­cently and the Dow very close to the mag­i­cal 20,000 mark, in­vestors had made fairly clear their ex­pec­ta­tion of an in­ter­est rate hike, only the sec­ond in a decade.

Had the Fed failed to take ac­tion at the two-day meet­ing on mon­e­tary pol­icy this week, its plans for the “nor­mal­iza­tion” of in­ter­est rates above their his­tor­i­cally low lev­els, which al­ready fell off track for much of 2016, would lose all cred­i­bil­ity, giv­ing rise to chaos and fears in in­ter­na­tional fi­nan­cial mar­kets.

Still, the be­lated in­ter­est rate hike does not come with­out a price. A quar­ter-point in­crease has been fully priced in while two or three are ex­pected next year. And Trump’s call for faster in­ter­est rate hikes has helped send the dol­lar higher to hurt emerg­ing mar­kets by lead­ing to cur­rency de­val­u­a­tion and cap­i­tal flights from emerg­ing economies.

For those who be­lieve in the slo­gan “Amer­ica first”, they can shrug off the im­pact of the Fed’s de­ci­sion on many de­vel­op­ing economies by say­ing it’s none of their busi­ness. Yet it is un­re­al­is­tic for the US economy to thrive on ex­ces­sive volatil­ity in the global fi­nan­cial mar­kets that will de­prive de­vel­op­ing coun­tries of a sta­ble en­vi­ron­ment for growth and de­press their de­mand for US ex­ports.

Be­sides, the fact that the Fed was so re­luc­tant to raise rates de­spite seem­ingly rosy eco­nomic data on the health of the US economy also high­lights the wor­ries that ac­cel­er­ated mon­e­tary tight­en­ing could eas­ily top­ple a fledg­ing re­cov­ery backed by ex­tremely ac­com­moda­tive mon­e­tary poli­cies.

The Fed and other coun­tries’ cen­tral banks that have em­braced cheap money as more than a short-term painkiller will have to face the dilemma of “damned if you do, damned if you don’t” when they try to nor­mal­ize in­ter­est rates in their economies.

Slowly as it is, it is hoped that the Fed can con­tinue to dig it­self out of the hole of cheap money with­out in­ter­rupt­ing the US re­cov­ery or wreck­ing havoc in in­ter­na­tional mar­kets. If that is the case, the Fed can breathe a sigh of re­lief for man­ag­ing to safely walk through the pow­der house torch in hand. If not, no cen­tral bank should con­tinue play­ing with the in­ef­fec­tive alchemy of cheap money be­cause the Fed is not buy­ing time for nec­es­sary struc­tural re­forms but clos­ing the win­dow of op­por­tu­nity on it.

As the world’s sec­ond-largest economy, China is not im­mune to the con­se­quences of both the global fi­nan­cial cri­sis and some im­me­di­ate pol­icy re­sponses. Se­vere over­ca­pac­ity in some sec­tors, and as­set bub­bles in the stock mar­ket and the hous­ing mar­ket have shown that cheap credit with­out painful struc­tural re­forms will not be enough to sus­tain China’s eco­nomic devel­op­ment af­ter more than three decades of dou­ble-digit growth.

For Chi­nese pol­i­cy­mak­ers, struc­tural re­forms will re­main a top pri­or­ity to boost sus­tain­able growth driven by in­no­va­tion and do­mes­tic con­sump­tion. If China suc­ceeds in its eco­nomic trans­for­ma­tion, the alchemy of cheap money will prove to­tally un­nec­es­sary.

The au­thor is a se­nior writer with China Daily. zhuqi­wen@chi­nadaily.com .cn

LIU XINYI / FOR CHINA DAILY

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