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Economic Daily News: Cooperate to resolve financial crisis

Economic Daily News: Cooperate to resolve financial crisis

International financial volatility triggered by the depreciation of the Chinese yuan in August eventually led to the falling of the last domino -- the United States. On Aug. 20 and 21, the U.S. stock market plunged by 6 percent, causing all Asian markets to tumble in panic selling. According to Nobel Prize-winning economist Paul Krugman, the latest global stock market crash happened because there is too much capital chasing too few investment opportunities. This "hot money" has not been directed at substantive investments but has flown into the housing, stock and bond markets, forming one bubble after another. After six years of a bull market, a pullback in U.S. stocks was seen as a matter of course. Strengthening international cooperation is the way to reduce the impact of the latest market volatility. First, the U.S. Federal Reserve should drop its plan to raise interest rates. American economist Lawrence Summers has warned that raising rates in the near future would be a serious mistake that would threaten all three of the Fed's major objectives -- price stability, full employment and financial stability. Second, China should slow down its pace of economic transformation. Chinese leaders have been trying to promote various reforms at the same time, but some of these reforms are at odds with each other. For example, while transiting from an investment-driven growth model to a consumption-driven growth model, China cannot allow its economic growth to drop too much. While trying to restrict speculative activities in the housing and stock markets, China needs to make sure such actions do not hurt the economy. Because of China's huge economy, whatever economic or financial reforms it initiates have the potential to send confusing signals to financial markets, generating unexpected shocks. Third, all countries should expand their cooperation on public investment. The experience of the United States and Japan in implementing quantitative easing policies has proven the limitations of expansionary monetary policy. There is a need to shift to expansionary fiscal policy. When it comes to creating more investment opportunities and guiding idle capital into substantive investments, the International Monetary Fund, World Bank and Asian Infrastructure Investment Bank can lend a hand, and cooperation among countries is a necessary condition. (Editorial abstract -- Aug. 25, 2015) (By Y.F. Low)


Updated : 2021-09-23 19:57 GMT+08:00