China’s economy has been suffering major setbacks this year. There had been a severe drop in spending. The lack of demand has hit China’s manufacturing sector which is a major source of China’s growth since the last few decades. The easing of lending rules by the central bank of China is a welcome move at a time when the economy is facing a major slowdown since the East Asian crisis of 1998. The commercial banks in China will now be able to increase the volume of their lending. This is supposed to give a big impetus to the economy. Though it is a welcome move a lot of ifs and buts remain with this sudden change in policy.
An economy which is facing a downturn of course requires some monetary easing. But the monetary expansion may simply lead to boosting the stock market and aiding the large firms. The small firms may still suffer under sluggish growth and lack of demand. The lack of spending cannot be corrected by monetary policy alone. It should be remembered that the policy makers in China still maintain a number of restrictions on the market and also on the consumption and purchase. For example, there is restriction on the ownership of cars. The number of cars a person can purchase is restricted in many of the states in China. This had been a major reason for the debacle of China’s car market which has been facing a large amount of inventory accumulation.
The monetary easing comes in the form of the inclusion of non-bank financial assets in to the banks’ deposits. The banks are not required to maintain an additional amount of reserves with the central bank for making loans and advances against these assets. The monetary expansion does not promise a reduction in the cash reserve ratio. This may not have any effect on the rate of interest in the economy. A fall in the interest rates leads to increased investment which of course boosts production and increases income and employment. I would again like to point out that the Chinese commercial banks primarily lend to the big government firms as the small private businesses do not find it worth borrowing at a high interest rate. What the economy of China requires is not just a monetary injection but a financial reform that gives more freedom to the commercial banks in terms of to whom and at what rates they lend. With production remaining stagnant, the injection of the credit in the economy will only lead to inflation and a stock market boost leading to a higher speculative earning which of course will be short-lived.
What the Chinese economy now requires is not just a monetary easing but also a fiscal backing. This can only revive the fall in spending the economy is experiencing in recent times. Without the increase in spending the higher cash flow will not induce the businesses to boost their activities as an animated production system will only lead to a higher accumulation of inventories as there are few buyers. A fiscal expansion will solve this problem with a boost in earning which will be reflected in spending. More important is the relaxation of the restrictions which prevail in several aspects of the economy.
Works Cited
Mankiw, G.N. Macroeconimcs. Macmillan, 2013.
Wei, Lingling. "China to Ease Rules to Boost Lending." Wall Street Journal 25 December 2014.
