While debate swirls in the United States about the merits of a second round of fiscal pump-priming, market talk in China has abruptly switched to whether the central bank will soon need to abandon the easy monetary stance it adopted late last year.
The Chinese economy has successfully touched bottom and has started to rebound. Banks extended 1.53 trillion yuan ($224 billion) in new loans in June, taking new credit for the first half of the year to 7.37 trillion yuan, or almost 25 percent of last year's gross domestic product.
The record pace of lending is fanning worries among academics and regulators that bank credit is inflating new stock and property bubbles and could sow the seeds of a new crop of bad loans in the predominantly state-owned banking system.
Continued signs of economic improvement have raised market interest rates and heightened expectations for a turn in monetary policy. The authorities are increasingly showing intent to rein in liquidity growth, Turning to a more neutral monetary policy is appropriate at this time.
I hope the China’s move is more likely to be the central bank of China moving from an extremely loose monetary policy stance to a still accommodative level, rather than a significant shift to a growth-suppressing position. I also hope that their stimulus spending remain in place until the economic turnaround is fully secured.
In the other economic powers, the US and several European countries except Germany think the economic recovery from the steepest recession since World War II is still too fragile for them to consider reversing efforts to pump money into the economy. The door should remain open to more stimulus measures. Economies still need as much stimulus as possible. It’s important not to react too soon to early signs of a pickup or take false comfort from them.
I see exit strategies in the future will vary from country to country depending on domestic economic conditions and public finances. But there is still uncertainty and risk in the system. While exit strategies can be drawn up, it’s not time to put them into place now.
I think the governments around the world would risk killing the recovery if they removed the life-line too quickly.
The revival is not yet assured, so it is too soon to unwind economic growth packages. Significant risks still remain to economic and financial stability.
However, bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 percent of gross domestic product in 2014, according to the IMF. The first priority is to spend wisely what has already been committed. Before there’s talk of additional stimulus, all countries should make sure that the stimulus that has been announced actually gets effectively and efficiently delivered and implemented. Moreover, spending more borrowed money is potentially counterproductive.
Chodechai Suwanaporn Chodechai @fpo.go.th
Source: Fiscal Policy Office / www.fpo.go.th