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A turning point in strategy
[2008-12-30 15:20:35]
November 13, 2008
A series of prompt measures taken by the Chinese government recently to boost domestic demand has become another turning point in strategy amid the global battle against the financial crisis.
International community took a proactive combination of “fiscal policy plus monetary measure” to tackle the financial turmoil instead of solely depending on monetary policy as it did in the past. The steps China has adopted not only made contribution to curbing the world’s economy from slowing down, but also laid solid foundation for the global economy in the future.
Decision-makers in some western countries overlooked the depth and width of the financial crisis. Many measures taken so far were not forceful and thus not competent to tackle the crisis. Prior to the deterioration of the crisis this September, policies in western countries emphasized on easing the lack of fluidity in financial market. However, the real crisis lay in the loss of reimbursement of large financial institutions, which could lead to bankruptcy, rather than the lack of fluidity.
The crisis has developed into a system risk that could push the entire financial system to collapse as the policy centre moved to the individual bankruptcy case of financial institutions. Some western countries changed their policies in October reluctantly with a batch of emergency measures on system problems, including capital injection to banks, guarantee for loans, saving insurance and so on. Meanwhile, central banks decided to cut rate after realizing the importance of coordination of international policy. The emergency plan played roles in saving financial market, the credit market in particular from further deteriorating. But the financial market could not be restored quickly in light of the devastating crisis.
The world financial crisis entered the new phase in late October. The economy in industrialized nations showed strong sign of recessions: consumption and commercial investment shrunk and unemployment rate went up. The crisis spread quickly to the real economy at the same time, resulting in decrease in foreign investment, high financing cost, price reduction for primary commodity and export decline. Central banks consequently adopted stronger rate cuts.
Rate cuts and some of the monetary policies that enhanced circulation could stabilize financial market and stimulate demand. However, the monetary policy alone could not effectively prevent consumption and investment demand from declining in consideration to the twists and turns of the global financial crisis. Deflation could occur if consumers and investors lose confidence and economic growth could not satisfy the monetary demand, even if rate cuts and circulation within bank system are carried out and strengthened.
Therefore, fiscal policy must be implemented to stimulate social demand. Consumers and investors will regain their confidence and economy will be lifted out of recession if government invests more on infrastructure, spends more on social services, allocates money from central bank previously intended within bank system to national economy, creates more jobs and raises residents' income.
As the world's economy is deep in crisis, the priority will be making a package of stimulus that complies with each country’s present condition. China took the lead in initiating policies to greatly expand domestic demand, integrate the proactive fiscal policies with flexible monetary measures. Such moves will offset the export slowdown caused by expansion of domestic demand, and furthermore enhance import so as to fuel up the development of world economy.
It is reported that many countries are considering publishing fiscal stimulus package. World leaders are expected to take joint actions to curb the crisis from spreading and reduce its impact at the G-20 Summit on Financial Market and World Economy to be held soon. The close cooperation and enhanced coordination among governments, effective and efficient policies and measures will prevent the world economy from further worsening.
By People's Daily Online
International community took a proactive combination of “fiscal policy plus monetary measure” to tackle the financial turmoil instead of solely depending on monetary policy as it did in the past. The steps China has adopted not only made contribution to curbing the world’s economy from slowing down, but also laid solid foundation for the global economy in the future.
Decision-makers in some western countries overlooked the depth and width of the financial crisis. Many measures taken so far were not forceful and thus not competent to tackle the crisis. Prior to the deterioration of the crisis this September, policies in western countries emphasized on easing the lack of fluidity in financial market. However, the real crisis lay in the loss of reimbursement of large financial institutions, which could lead to bankruptcy, rather than the lack of fluidity.
The crisis has developed into a system risk that could push the entire financial system to collapse as the policy centre moved to the individual bankruptcy case of financial institutions. Some western countries changed their policies in October reluctantly with a batch of emergency measures on system problems, including capital injection to banks, guarantee for loans, saving insurance and so on. Meanwhile, central banks decided to cut rate after realizing the importance of coordination of international policy. The emergency plan played roles in saving financial market, the credit market in particular from further deteriorating. But the financial market could not be restored quickly in light of the devastating crisis.
The world financial crisis entered the new phase in late October. The economy in industrialized nations showed strong sign of recessions: consumption and commercial investment shrunk and unemployment rate went up. The crisis spread quickly to the real economy at the same time, resulting in decrease in foreign investment, high financing cost, price reduction for primary commodity and export decline. Central banks consequently adopted stronger rate cuts.
Rate cuts and some of the monetary policies that enhanced circulation could stabilize financial market and stimulate demand. However, the monetary policy alone could not effectively prevent consumption and investment demand from declining in consideration to the twists and turns of the global financial crisis. Deflation could occur if consumers and investors lose confidence and economic growth could not satisfy the monetary demand, even if rate cuts and circulation within bank system are carried out and strengthened.
Therefore, fiscal policy must be implemented to stimulate social demand. Consumers and investors will regain their confidence and economy will be lifted out of recession if government invests more on infrastructure, spends more on social services, allocates money from central bank previously intended within bank system to national economy, creates more jobs and raises residents' income.
As the world's economy is deep in crisis, the priority will be making a package of stimulus that complies with each country’s present condition. China took the lead in initiating policies to greatly expand domestic demand, integrate the proactive fiscal policies with flexible monetary measures. Such moves will offset the export slowdown caused by expansion of domestic demand, and furthermore enhance import so as to fuel up the development of world economy.
It is reported that many countries are considering publishing fiscal stimulus package. World leaders are expected to take joint actions to curb the crisis from spreading and reduce its impact at the G-20 Summit on Financial Market and World Economy to be held soon. The close cooperation and enhanced coordination among governments, effective and efficient policies and measures will prevent the world economy from further worsening.
By People's Daily Online
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