Chinas Monetary-Policy Surprise

NEW HAVEN – In economic policy, as in most other areas, actions speak louder than words. By cutting its benchmark policy interest rates, the People’s Bank of China (PBOC) has underscored the tactical focus of the government’s stabilization policy, which aims to put a floor of around 7% on GDP growth.

Achieving this goal will be no small feat. China’s economy is facing structural headwinds arising from the shift to a new model of services- and consumer-led growth, and cyclical pressure, as a tough global environment puts downward pressure on the old export and investment-led model.

The cyclical challenges, in particular, are proving to be more severe than anticipated. Though exports have declined considerably from their pre-crisis peak of 35% of GDP, they continue to account for about 24%, leaving China exposed to the global growth cycle – especially to markets in the developed world, where demand is exceptionally weak.

Indeed, 42% of Chinese exports go to Europe, the United States, and Japan – three economies that are flirting with secular stagnation. And Europe, China’s largest export market, has struggled the most.

Given that development strategies begin to fail when economies reach middle-income status – a threshold that China is rapidly approaching – China cannot afford to allow mounting cyclical risks to undermine its structural transformation. Modern history shows that the best way for a developing country to become ensnared in the dreaded “middle-income trap” is to cling to its old model for too long.

The fact is that only structural transformation can lift a middle-income developing country to high-income developed status. Fortunately, China’s leaders recognize this, and are committed to achieving it.

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© Project Syndicate

© Project Syndicate

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