China needs policy toolbox to fend off financial risks

By Wen Sheng Source:Global Times Published: 2018/9/13 22:38:40

Illustration: Xia Qing/GT

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" incidents that occur either in China or abroad. Domestically, troubled peer-to-peer platforms and the declining stock market are two lurking dangers that warrant attentive oversight.

The author is an editor with the Global Times.

Posted in: INSIDER'S EYE

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