Poli­cies needed to curb fi­nan­cial risks

Global Times - - Business - By Wen Sheng

As of­fi­cial sta­tis­tics point to an ac­cel­er­a­tion of de­fla­tion­ary pres­sure in China’s vast man­u­fac­tur­ing sec­tor, ex­perts are sug­gest­ing that the author­i­ties in Bei­jing take more steps to loosen fis­cal and mon­e­tary pol­icy to sup­port eco­nomic growth.

The Na­tional Bureau of Sta­tis­tics said the pro­ducer price in­dex rose 4.1 per­cent year-on-year in Au­gust but fell 0.5 per­cent­age point from July’s read­ing. These fig­ures, which caught most mar­ket watch­ers off guard, speak to the mag­ni­tude of slow­ing eco­nomic ac­tiv­ity at a time of in­ten­si­fy­ing trade ten­sion with the US.

Days ago, the Trump ad­min­is­tra­tion threat­ened to im­pose ad­di­tional tar­iffs on all im­ports from China. If that hap­pens, it will se­ri­ously erode bi­lat­eral trade vol­ume, dis­rupt the sup­ply chains of as­sem­bly lines in both coun­tries and be­yond, and in­flict much pain on mid­dle-class fam­i­lies in the US.

Zhou Xiaochuan, for­mer gover­nor of the Peo­ple’s Bank of China (PBC), the cen­tral bank, told US fi­nan­cial net­work CNBC in an in­ter­view that nu­mer­i­cal mod­el­ing shows “it is less than half a per­cent (of an) im­pact to the Chi­nese econ­omy,” speak­ing of the neg­a­tive im­pact of the trade war. He did not com­ment on the pos­si­ble im­pact on the US econ­omy.

It would be ac­cept­able to Chi­nese pol­i­cy­mak­ers and most of the Chi­nese public if the world’s sec­ond-largest econ­omy ex­pands 6 per­cent an­nu­ally, tak­ing into ac­count the unprecedented trade war against China by the Trump ad­min­is­tra­tion. In re­cent years, China’s cen­tral gov­ern­ment has set its yearly eco­nomic growth tar­get at 6.5 per­cent, and in 2017, the econ­omy ac­tu­ally grew by 6.8 per­cent.

Nev­er­the­less, it’s a good idea for top eco­nomic plan­ners in Bei­jing to be on alert and pre­pare their tool­box of fis­cal and mon­e­tary poli­cies, in case the econ­omy shows any signs of weak­ness. Any sharp down­turn might cause big prob­lems like mass job­less­ness and so­cial dis­tur­bances.

If ex­pe­ri­ence is any guide, the author­i­ties could use a port­fo­lio of pol­icy tools to pro­pel growth by such means as in­creas­ing fis­cal in­vest­ment on in­fra­struc­ture and high-tech­nol­ogy projects, and by cut­ting per­sonal and cor­po­rate taxes to in­duce do­mes­tic spend­ing.

At the same time, the PBC must main­tain rel­a­tively loose mon­e­tary pol­icy to en­sure suf­fi­cient liq­uid­ity in the mar­kets, which will also help pre­vent de­fla­tion­ary pres­sure from build­ing up.

In the af­ter­math of the Plaza Ac­cord, which Japan signed with the US in New York in Septem­ber 1985, Tokyo was forced to let the yen ap­pre­ci­ate against the US dol­lar, which sig­nif­i­cantly low­ered Ja­panese ex­ports to the US mar­ket. Japan’s econ­omy, for as long as 20 years there­after, was af­fected by de­fla­tion and ane­mic growth.

If the Trump ad­min­is­tra­tion ob­sti­nately sticks to im­pos­ing tar­iffs on Chi­nese im­ports and launch­ing a pro­tracted trade war, in­ter­rup­tions in ex­ports to the US are likely to cause mas­sive in­ven­tory build-ups and un­used man­u­fac­tur­ing ca­pac­ity in China, which will lead to broad price drops and pos­si­bly de­fla­tion.

There­fore, it is im­per­a­tive for polic­mak­ers to al­ways keep abreast of mar­ket changes, pro­vide ad­e­quate liq­uid­ity to fa­cil­i­tate do­mes­tic con­sump­tion and seek more trade with other economies.

In July, the cen­tral author­i­ties en­cour­aged China’s provin­cial-level gov­ern­ments to raise more than 1 tril­lion yuan ($146.05 bil­lion) through bond sales. This mea­sure will pro­vide fund­ing for in­fra­struc­ture projects and so­cial wel­fare, which in turn could ac­ti­vate do­mes­tic spend­ing and spur eco­nomic ac­tiv­ity. Lo­cal gov­ern­ments are also be­ing urged to in­crease per­sonal dis­pos­able in­comes to sup­port con­sump­tion.

It is ad­vised that the cen­tral gov­ern­ment should set up a cri­sis re­sponse sys­tem to

tackle any “black swan”

It is ad­vised that the cen­tral gov­ern­ment should set up a cri­sis re­sponse sys­tem to tackle any “black swan” in­ci­dents that oc­cur ei­ther in China or abroad.

in­ci­dents that oc­cur ei­ther in China or abroad. Do­mes­ti­cally, trou­bled peer-topeer plat­forms and the de­clin­ing stock mar­ket are two lurk­ing dan­gers that war­rant at­ten­tive over­sight. The au­thor is an editor with the Global Times. bi­zopin­ion@glob­al­times.com.cn

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