China's remarkable growth has been financed recently by a rapid expansion of money and bank credit that is producing an increasingly unsustainable investment boom. This renews concerns that the country may not be able to avert a replay of the painful boom?and-bust cycle such as the one it endured in the mid-1990s.
Monetary policy is usually the first line of defense in such situations. But China's monetary policy has been hamstrung by the tightly managed exchange-rate regime. This regime prevents the central bank -- the People's Bank of China -- from taking appropriate policy decisions to manage domestic demand, because interest-rate hikes could encourage capital inflows and put further pressure on the exchange rate.
There is, of course, a vigorous ongoing debate about China's exchange-rate policy. China's rising trade surplus has led some observers to call for a revaluation of the yuan to correct what they see as an unfair competitive advantage that China maintains in international markets. Others argue that the stable exchange rate fosters macroeconomic stability in China. But this debate misses the point.
What China really needs is a truly independent monetary policy oriented to domestic objectives. This would enable the central bank to manage domestic demand by allowing interest rates to rise in order to rein in credit growth and deter reckless investment. An independent monetary policy requires a flexible exchange rate, not a revaluation. But what could take the place of the stable exchange rate as an anchor for monetary policy and for tying down inflation expectations?
We recommend a low inflation objective as the anchor for monetary policy in China. Theoretical research and the practical experiences of many countries both show that focusing on price stability is the best way for monetary policy to achieve the broader objectives in the charter of the central bank: macroeconomic and financial stability, high employment growth, etc.
The low inflation objective need not involve the formalities of an inflation-targeting regime, such as that practiced by the European Central Bank and the Bank of England, and is similar in approach to that recommended for the US by Federal Reserve Chairman Ben Bernanke.
How could such a framework be operated effectively in an economy in which financial sector problems have weakened the monetary transmission mechanism? This is a key concern because, notwithstanding recent reforms, the banking system remains fragile. Nevertheless, we believe that a minimal set of financial sector reforms -- essentially making banks' balance sheets strong enough to withstand substantial interest-rate policy actions -- should suffice to implement a low inflation objective.
Although full modernization of the financial sector is a long way off even in the best of circumstances, the minimal reforms that we recommend could strengthen the banking system sufficiently in the near term to support a more flexible exchange rate anchored by an inflation objective. Indeed, price stability, and the broader macroeconomic stability emanating from it, would provide a good foundation for pushing forward with other financial sector reforms.
The framework we suggest has the important benefit of continuity. The central bank would not have to change its operational approach to monetary policy. Only a shift in strategic focus would be needed to anchor monetary policy with a long-run target range for low inflation. Monitoring of monetary (and credit) targets would still be important in achieving the inflation objective. Furthermore, it should be easier to adopt the new framework when times are good -- like now, when growth is strong and inflation is low.
There is some risk that appreciation of the exchange rate, if greater flexibility were allowed, could precipitate deflation. What this really highlights, however, is the importance of framing the debate about exchange-rate flexibility in a broader context. Having an independent monetary policy that could counteract boom-and-bust cycles would be the best way for China to deal with such risks.
Contrary to those who regard the discussion of an alternative monetary framework as premature, there are good reasons for China to begin right now to build the institutional foundation for the transition to an independent monetary policy. Indeed, early adoption of a low inflation objective would help secure the monetary and financial stability that China needs as it allows greater exchange-rate flexibility.
Marvin Goodfriend is a professor at the Tepper School of Business at Carnegie-Mellon University and was previously senior vice president and policy adviser at the US Federal Reserve Bank of Richmond, Virginia. Eswar Prasad is chief of the Financial Studies Division in the IMF's Research Department. Copyright: Project Syndicate
Weeks into the craze, nobody quite knows what to make of the OpenClaw mania sweeping China, marked by viral photos of retirees lining up for installation events and users gathering in red claw hats. The queues and cosplay inspired by the “raising a lobster” trend make for irresistible China clickbait. However, the West is fixating on the least important part of the story. As a consumer craze, OpenClaw — the AI agent designed to do tasks on a user’s behalf — would likely burn out. Without some developer background, it is too glitchy and technically awkward for true mainstream adoption,
Out of 64 participating universities in this year’s Stars Program — through which schools directly recommend their top students to universities for admission — only 19 filled their admissions quotas. There were 922 vacancies, down more than 200 from last year; top universities had 37 unfilled places, 40 fewer than last year. The original purpose of the Stars Program was to expand admissions to a wider range of students. However, certain departments at elite universities that failed to meet their admissions quotas are not improving. Vacancies at top universities are linked to students’ program preferences on their applications, but inappropriate admission
On Monday, a group of bipartisan US senators arrived in Taiwan to support the nation’s special defense bill to counter Chinese threats. At the same time, Beijing announced that Chinese President Xi Jinping (習近平) had invited Chinese Nationalist Party (KMT) Chairwoman Cheng Li-wun (鄭麗文) to visit China, a move to make the KMT a pawn in its proxy warfare against Taiwan and the US. Since her inauguration as KMT chair last year, Cheng, widely seen as a pro-China figure, has made no secret of her desire to interact with the Chinese Communist Party (CCP) and meet with Xi, naming it a
Taiwan People’s Party (TPP) Chairman Huang Kuo-chang (黃國昌) took the stage at a protest rally on Sunday in front of the Presidential Office Building in Taipei in support of former TPP chairman Ko Wen-je (柯文哲), who has been sentenced to 17 years in jail for corruption and embezzlement. Huang told the crowd that Chinese Nationalist Party (KMT) Chairwoman Cheng Li-wun (鄭麗文) had sent a message of support the previous day, saying she would be traveling from the south to Taipei: If the protest continued into the evening, she had said, she would show up. The rally was due to end
RSS