On January 7, 2010, China’s Central Bank, the People’s Bank of China, took measures to tighten China’s money policy. The interbank interest rate was raised by setting the 3-month monetary stabilization bond at 1.3684%, 0.04%p up from the previous week; and on January 13, the bank raised the reserve requirement ratio by 0.5%p. These two measures have naturally been interpreted as signals that China might turn to a tight money policy soon.
Since November 2008, the Chinese government has been pumping 14% of its GDP, or a staggering US$580 billion, into the market in hopes of stimulating the local economy. However, just as economists have been pointing out, we are starting to see a “massive stimulus breakout.” China is left with enormous excess capacity from last year’s sharp exports drop, and with this excess in liquidity China is at risk of an asset bubble. If this bubble were to burst as China grapples with the burden of its excess capacity, the world may very well face another crisis. As such, China’s ability to address these issues has become a burning interest for many. In this regard, the above two measures taken by China indicates an attempt to withdraw this excess liquidity in order to prevent the risk of inflation and an asset bubble. Furthermore, these measures can also be interpreted as signs that the Chinese economy has recovered to some degree.
Applying financial decisions should be taken under consideration, as a sudden retrieval of all the capital support or a full-scale exit policy could shock the market and cause domestic consumption to contract rather than cleaning up the economy at home and abroad. It is important that domestic consumption is not tightened, since boosting consumption is a way to sustain the economy considering the decline in exports. In addition, in today’s world where every economy is closely related, a full-scale exit policy by one major economy, in this case China, may bring about a series of global trade contractions. The present situation of the exit policy is where the economic concept of fallacy of composition-what is true for a part may not be true for the whole-kicks into high gear. In this global economy there is a high possibility that when the whole fails, the part will also fail. The worst case scenario is that a paralysis of the global economy may be a result of such a series of global trade contractions. Therefore, applying micro policy adjustment at an individual economy level, the exit policy should be discussed through sophisticated acute international cooperation.
Certainly, excess global liquidity should be controlled to prevent another bubble burst. Thus, a graduate and modest exit policy-one that will not shock the global economy-should be discussed in due course. I think the G20 Summit to be held in Seoul in November this year is the right place for discussions on international cooperation regarding the exit policy.
It was reported that China was not very cooperative at the UN climate conference held in Copenhagen in December. Indeed, climate change is an unusually grand and complex problem. Having said that, binding an international agreement is not simple. Furthermore, even an argument against global warming- mini ice age argument-has recently been raised. Therefore, China’s position on climate change can be fully understood. However, an exit policy is a different case. In today’s world, where a financial action can become a cascade, all major economies, including China, should take up the exit policy with a high degree of sophisticated and thorough international cooperation.