Institutional Policy Must be the Highest Priority
Professor, CCER at Peking University
Currently, there are four difficulties in front of us. Firstly, while policies in the past few years that were aimed at depressing overheated domestic demand become obstacles now. Secondly, current subprime crisis in the western countries has a negative impact on China's export. Thirdly, drastic swing of asset prices hurt not only the financial status but also the capabilities of firms and households. Finally, under improper price intervention and administrative intervention, the economy has become less flexible.
There are many explanations of current subprime crisis and financial crisis. A crucial reason is the US's faulty management of dollar. Since dollar became a fiat money, it also became a curse of the economy, especially as a world currency. While the US has not resisted the temptation of issuing excessive dollar, those countries who peg to dollar also have trouble.
Inflation is always monetary phenomena. In China, the undervalued RMB overheated the export sectors. The authority is only able to set nominal exchange rate rather than real exchange rate. When nominal exchange rate is fixed, trade surplus increases base money, leads to asset price booms and finally inflation. In response, macroeconomic policies are implemented to cool down overheated demand.
Monetary policy itself is not enough to overcome the difficulties. Although monetary policy is efficient to curb inflation, it is less effective to stimulate economic growth. Especially, the Chinese monetary authority can not issue RMB to the world as the US counterpart does.
In order to maintain stabilization in current circumstance, China has to shift from an outside oriented structure to a more balanced structure. Among all policies, institutional policies should be given the highest priorities. Provisional price intervention should be abolished. Instead, price reforms should be carried over. Secondly, both taxes and expenditures should be cut. Thirdly, more competition should be allowed in monopoly sectors. Fourthly, mandatory regulations that came out in recent years should be reappraised. Finally, an easier land policy should be implemented.