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Seek a global solution

(China Daily)
Updated: 2008-10-10 07:43

China's decision to cut interest rates for the second time in less than a month may be interpreted as an encouraging sign that the world's fourth largest economy is participating in global efforts to tackle a worsening global financial crisis.

Soon after six central banks in North America and Europe cut interest rates, the People's Bank of China reduced not only interest rates for loans and deposits but also the proportion of deposits that banks must hold in reserve.

The move shows that the Chinese authorities are fully aware of the global situation. By responding swiftly to the coordinated easing by global central banks, China has given a considerable boost to the global confidence to save the world economy from sliding into a deep recession. Given its importance to the global economy, an accommodating Chinese monetary policy will largely raise the chance for a global solution to effectively prevent a further deepening of the financial crisis.

However, it makes little sense to expect Chinese policymakers to always fall in step with other major central banks to maximize the effect of their emergency actions.

The sweeping cuts in interest rates by central banks on Wednesday only mark the beginning of a comprehensive international monetary policy response to the turmoil in financial markets that shows no sign of abating.

Operating in tandem alone is not enough to deal with the very severe financial crisis the world is facing. Harder and greater efforts have to be made by policymakers, in line with the different situations of their countries, to contain the looming economic risks.

For China, a major growth engine for the world economy, the most important task is certainly to maintain domestic growth.

After more than five years of double-digit expansion, the Chinese economy has been slowing down so far this year due to domestic credit control aimed at fighting soaring inflation and diminishing exports as a result of the collapse in demand from the US and Europe.

To cope with this economic reality, rather than just a problematic financial sector, China has no choice but to focus on boosting its domestic demand. It is in this sense that China's second cut of interest rates in three weeks is definitely necessary.

Though third-quarter statistics are not available yet, the combination of an increasingly global downturn and global financial stress has made it clear that proactive policies to support domestic growth are badly needed in China now.

Monetary easing is of course part of the policy tools at hand to boost domestic demand. But more fiscal stimuli may be even better in fostering consumption growth that is gathering momentum.

As long as the country manages to maintain rapid growth while making it more sustainable, all the measures the Chinese government takes should be viewed as part of the joint endeavor needed to fix the global financial crisis.

(China Daily 10/10/2008 page8)