GT Voice: China has adequate policy tools to deal with internal and external risks

Photo: Xinhua

US Federal Reserve Chairman Jerome Powell said on Wednesday he would back a quarter-percentage-point rate hike at the central bank’s monetary policy meeting in March to tame runaway inflation in the country. Meanwhile, across the Pacific, China’s central bank is expected to maintain stable monetary policy with flexible easing if needed.

The divergence between China’s and the United States’ monetary policy highlights the different trend of economic development in the world’s two largest economies.

Soaring inflation was one of the highlights of US President Joe Biden’s first State of the Union address, underscoring the seriousness of the inflation problem in the country. The US consumer price index for January rose 7.5% from a year ago, marking the fastest pace in 40 years and the ninth consecutive month of inflation above 5%.

Following the release of record CPI data, major financial indicators such as US equities, dollar index and US Treasuries experienced volatility due to market concerns over the US economic outlook under increased inflationary pressure. In this context, the Fed’s exit from the monetary easing policy is inevitable, while the US economy faces uncertainties, including the fallout from the situation in Ukraine.

Generally speaking, once the Fed changes its monetary policy by raising interest rates, other economies will more or less feel the ripple effect as liquidity flows back to the United States. In order to offset the trend of capital outflows, many countries will have to follow the United States in raising their interest rates as well.

But there are exceptions, like China. Despite the impact of the COVID-19 pandemic, China has adhered to prudent monetary policy instead of rolling out “unprecedented” massive stimulus packages like the United States. Such a policy approach has helped maintain price stability in China, with an average annual CPI increase of 2.1% since 2018.

Of course, relatively stable inflation does not mean that the Chinese economy is not under pressure. On the contrary, it should be noted that the Chinese economy is at a critical stage of economic transformation while also facing considerable downward pressure; therefore, stabilizing economic growth has become the most important task for the country at present.

The challenges China faces in stabilizing growth this year are even more daunting than in previous years. Tighter liquidity in the international market environment as well as housing sector deleveraging and the impact of the pandemic all point to more demands for monetary policy adjustment. Although adequate easing of stable monetary policy is always necessary to improve the overall monetary environment as the foundation for stable growth, it is also important to optimize the structure in order to avoid a “flood” of liquidity. , which can lead to financial risks in the market. .

The combination of the complicated situation requires a high level of flexibility in monetary policy to avoid volatility in order to maintain stable and positive expectations for the whole economy.

As long as China manages its own affairs well, external shocks will not be a big problem and the Chinese economy will have the capacity and conditions to adapt to any changes in global financial markets. Even the interest rate differential with the US market will not necessarily cause a massive outflow of foreign capital if China’s economic fundamentals are stable enough to support a safe haven in such a volatile world.

Shirlene J. Manley