Loose monetary policy should not worry China

China has a huge trade surplus and balance of payment surplus in its current accounts, which provides the yuan a solid support base. Hence, even if the yuan drops against the US dollar, the devaluation range will be comparatively small. And because most of the capital inflow into China is direct investment in the real economy sectors that have comparatively low volatility, the two surpluses provide further support for the yuan as far as its exchange rate against the greenback is concerned.

Brazil and other emerging market economies, which for long have been suffering from trade and balance of payment deficits, will face more difficulties in such a situation. The two deficits create sufficient reason for the market participants to be bearish about their domestic currencies' exchange rates, as this will cause the outflow of capital and thus aggravate the devaluation of their currencies, forming a vicious circle.

The sharp devaluation of a country's currency means primary commodity prices calculated in terms of its own currency will increase even if their prices in US dollars decrease in the global market. So, other emerging economies will face mounting inflation pressure, leaving their central banks to decide between loosening their monetary policies, which will boost economic growth, and lowering the inflation pressure.

Worse, to avoid falling into an international payment crisis, which can ignite an overall financial crisis, these countries, in many cases, have to maintain their interest rates and deposit reserve ratios at a high level, or even tighten their monetary policies, in a bid to attract portfolio investment irrespective of the harm it may cause to the real economy.

Tackling the real economy's crisis, in spite of its fatality, is less urgent than resolving the international payment crisis. That is why some countries take some makeshift measures to tackle the most urgent crisis first. India was in such a dilemma a few years ago. It is Brazil now.

As such, there is no need for China to worry too much about the side effects of loosening its monetary policy.

The author is a researcher in economics with the Ministry of Commerce.

(China Daily 08/29/2015 page5)