China’s Monetary-Policy Surprise

Nov 22, 2014 Stephen S. Roach

In economic policy, as in most other areas, actions speak louder than words. By cutting its policy benchmark interest rates, the People’s Bank of China has underscored the tactical focus of Chinese government’s stabilization policy: it aims to set a floor of around 7% on GDP growth.

NEW HAVEN – In economic policy, as in most other areas, actions speak louder than words. By cutting its benchmark policy interest rates on November 21, the People’s Bank of China (PBOC) has underscored the tactical focus of the government’s stabilization policy, which aims to put a floor of around 7% on GDP growth.

Achieving this goal will be no small feat. China’s economy is caught in the crossfire of structural and cyclical headwinds. Structural pressures have arisen from the shift to a new model of services- and consumer-led growth, and cyclical pressures stem from a tough global environment that has put downward pressure on the old model of export and investment-led growth.

The cyclical challenges, in particular, are proving to be more vexing than anticipated. Though exports have declined considerably from their pre-crisis peak of 35% of GDP, they continue to account for about 24%, leaving China exposed to the global growth cycle – especially to markets in the developed world, where demand is exceptionally weak.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Already have an account? Log in

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Subscribe Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 7 in all 7 Comments on this article

IJS Blog Dec 6, 2014

The People's Bank of China is embarking on attempting to fund the Chinese financial system with debt. Monetary policy will be a lever to control the population by manipulating real interest rates; the price of money being lent, borrowed, invested, and consumed.
-IJS
A new reply to this comment has been posted.
olash solomon Nov 30, 2014

China should use monetary expansion as last resort, there are lot of ways to deepening domestic consumption and shared infrastructure /co ownership of refinery, power generation, heavy industrial manufacturing in fast growing, highly populated places like Nigeria
A new reply to this comment has been posted.
Michael Pietrusinski Nov 24, 2014

I don't understand why decision makers around the world still have problems in understanding how fiscal and monetary policies work - and how they impact the economy.

First of all, fiscal and monetary expansion are not interchangeable. You can't replace fiscal stimulus with monetary easing (and vice versa).

Secondly, statistical growth in GDP is just a side effect, not a direct result of each of these policies. Neither of them makes an economy more efficient - and only increase in efficiency constitutes true economic development.

Thirdly, both fiscal and monetary policies have a very limited area of use and neither of them can be applied to improve economic situation in anything more than statistics. These results are also short lived and have a deferred cost - in public debt, or inflation, or commercial debt overhang - either of which will cause economic crash sooner or later.

Fiscal intervention can only be used in capital intensive, massive investments at a national level - to build foundation for the private sector to thrive (Singapore being a prime example).

Monetary easing is even more limited - it can only help the economy if it's constrained by the money supply, which failed to follow growth in economic efficiency and value added, created in the economy.

I'd find it hard to decide which is less needed in China, because both are certainly not welcome. As all governments in the 21st century (so far) Xi Jinping's administration is reaching for an quick remedy, rather than a fundamental reform.

Instead of accepting a temporary slow down, to allow the markets to clean themselves off poor, inefficient and indebted companies, it will only allow more of them to get in even bigger trouble, while the eventual fallout of massive defaults will rock the economy much harder.

It's not a question of whether it happens, but when. Monetary easing is like pouring petrol on a fire.
A new reply to this comment has been posted.
Stamatis Kavvadias Nov 23, 2014

It does not seem to be the case that the Chinese model is the only problematic model. The totality of growth-based models are facing diminishing returns, as they are based on consumer ever growing spending. China's (and partly German) somewhat 'parasitic' approach to growth appear equally resilient to that of the reserve currency-based US model. The end of growth is approaching and we should be as grateful as panicked.
- Stamatis Kavvadias Nov 23, 2014
  
  What I mean is that both innovation-based and neo-mercantillism-based growth approaches are facing diminishing returns. Their remaining resort are investing/exporting in/to developing countries, and keeping such economies in under-developed or developing state by other means (like wars, resource shortages, oil prices, proprietary technologies and IP rights).
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Stamatis Kavvadias Nov 23, 2014

I believe you are making a mistake in identifying China as "exposed to the global growth cycle," since its labor costs are very competitive. Even if this can have significant impact on its GDP growth, it will have relatively less impact to the overall economy, compared with advanced economies. As far as this is concerned, China will continues to grow, at the expense of western economies and corresponding products, services and technologies developed in the high income countries.
A new reply to this comment has been posted.
Milton Kotler Nov 22, 2014

I think the most remarkable point in this essay is that 58 percent of China's export g0es to dveloping economies. This is an amazing target change, and I would like to see forward projections. I think Roach may underestimate Chinese veratiliity in exports and how its ODI to developing countries is paying off in exports.
Milton Kotler
A new reply to this comment has been posted.

https://prosyn.org/K8N7Y1W

Cookies and Privacy

China’s Monetary-Policy Surprise

To continue reading, subscribe now.

Support High-Quality Commentary

New Comment

Email this piece to a friend

Contact us

Log in/Register

Cookies and Privacy

China’s Monetary-Policy Surprise

To continue reading, subscribe now.

Support High-Quality Commentary

Edit Newsletter Preferences

Set up Notification