Zhu Qiwen

Time for debate on exit strategies

By Zhu Qiwen (China Daily)
Updated: 2009-11-23 07:57

The different pace of economic recovery across the world highlights not only the varying degrees of success in international efforts to fight the worst global financial and economic crisis in decades, it also underscores the urgency to discuss how stimulus measures should be withdrawn in line with conditions in each economy.

Last week, policymakers from different countries exchanged views on this issue because the international community seemingly cannot afford to wait until the next G20 summit is held sometime next year.

Speaking at a conference in Beijing on Nov 15, Liu Mingkang, chairman of the China Banking Regulatory Commission, said that the US Federal Reserve's policy of maintaining low interest rates together with the weak US dollar posed a threat to global economic recovery by encouraging a "huge carry trade" - the practice of borrowing money at low rates in one currency to invest in assets in another currency that offer a higher return - that was having a "massive impact on global asset prices".

Given the strong rebound of the Chinese economy that grew 8.9 percent in the third quarter from a year earlier and is expected to register double-digit growth in the fourth quarter, China's chief banking regulator has good reason to worry about the extreme loose monetary policy in the world's largest economy that can fuel speculative investment in emerging countries' stock and property markets. Even though inflation is not an immediate concern in China, inflationary expectation demands close attention from policymakers who have kept a vigilant eye on the risk of asset bubbles.

While emerging economies are considering how to withdraw stimulus measures before inflation returns, rich economies still have to struggle with deflationary pressure.

On Monday, US Federal Reserve Chairman Ben S. Bernanke said that US interest rates have remained very low for an extended period and would likely stay that way for some time. The Fed has kept its benchmark rate near zero since last December to spur an economic rebound. Though the US economy expanded at a 3.5 percent annual pace in the third quarter after a year-long contraction, soaring unemployment, shrinking consumer spending are stoking double-dip concerns. Under such circumstances, the Fed's stance of keeping rates low for an "extended period" to sustain economic growth is, to a certain extent, understandable.

However, that does not mean US policymakers can stick to the current stimulus policies regardless of the looming risk of further financial market turbulence exacerbated by the exceptional monetary measures taken to combat the crisis.

Germany's new finance minister, Wolfgang Schaeuble, echoed Chinese warnings on Friday about the growing threat of fresh global asset price bubbles fuelled by low US interest rates and a weak US dollar.

The current divergence of views on exit strategies does not look inspiring. The different speeds of recovery for various economies means that some countries definitely need to implement an exit strategy earlier than others. In an increasingly integrated global economy, the challenge ahead is how to coordinate macroeconomic policies to allow countries to make the exit in an orderly way.

By fuelling asset bubbles, the current loose US monetary policy and a weak US dollar have added to the difficulties for emerging countries that have led the global recovery to properly implement an exit strategy. A too early exit will heavily expose emerging economies to a double-dip in the global economy; and delays in adopting an exit strategy can risk runaway inflation.

Since no country can totally decouple itself from the global growth trend, the international community should have a serious discussion about how they will cooperate on exit strategies as well as on stimulating domestic growth to fight the crisis.

E-mail: zhuqiwen@chinadaily.com.cn