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Economic Daily News: China's efforts to stabilize its economy

Economic Daily News: China's efforts to stabilize its economy

Three days ago, China's central bank lowered the country's benchmark lending and deposit rates by 0.25 percentage points. It also cut the reserve requirement ratio by 0.5 percentage points.
International attention is now focused on whether a looser monetary policy can boost China's slow economy.
Over the past 18 months, China has lowered its benchmark interest rates five times and cut its reserve requirement ratio six times. At the same time, it has implemented structural tax cuts and adopted an expansionary fiscal policy by increasing public investment. Economic data for the past year, however, indicates that these less stringent policies have not achieved the desired results.
The latest drop in interest rates and reserve requirement ratio is expected to release liquid funds of 700 billion Chinese yuan. Theoretically, this would ease the capital crunch in the financial markets, which would help stabilize the capital market and reduce the downward pressure of the economy.
The problem is that in the past two months, the outflow of foreign exchange from China has exceeded 1 trillion yuan. The liquid funds released this time seem to be sufficient only to make up the currency shortfall.
As a result, market watchers generally expect China to further lower its benchmark interest rates and reserve requirement ratio soon. A more positive policy is needed to reverse the downward trend of China's economy. China's consumer price index has increased by only 1.5 percent, far below the target of 3.5 percent. There is still room for China to implement a looser monetary policy.
In a bid to spur economic growth, China has an obvious tendency to adopt an approach of loosening its monetary policy and stabilizing its currency. Such an approach meets the expectations of market players. However, due to the capital outflow, there is still room for the Chinese yuan to depreciate. In its efforts to stabilize the Chinese yuan, China's central bank will definitely not stop its intervention in the currency market.
But this will lead to a liquidity crunch, undermining the effects of the loose monetary policy. This is the dilemma for Chinese policy-makers. (Editorial abstract -- Aug. 28, 2015) (By Y.F. Low)


Updated : 2021-09-26 06:07 GMT+08:00