Governor: Stimulus to continue until recovery realized

10:37, March 26, 2010      

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Some parts of special economic stimulus policies could wind down if there is sustained economic recovery, said Zhou Xiaochuan, governor of People's Bank of China (PBC), at the annual meeting of Inter-American Development Bank yesterday. The stimulus package will only be abandoned on the condition that economic growth does not slow down again after the current rebound.

Zhou stressed that the precondition of ending the economic stimulus is that Chinese decision-makers need to see clear evidence showing that the recovery has enough momentum. He also said that an exit from fiscal and monetary stimulus measures needs to be orderly. The fiscal stimulus policy should be the last to withdraw for many counties.

Coincidentally, Lorenzo Bini Smaghi, a member of the European Central Bank Executive Board, commented on expansionary macroeconomic policy earlier in 2010. He saidthat the complex and rigid fiscal policies are hard to withdraw ahead of monetary policy, which has greater flexibility in general.

Zhou said that the central bank should steer clear of the debate over whether it is too early or too late. In particular, the bank must not give the signal that there is "little risk for a late exit," otherwise it will induce market participants to ignore the risks.

One industry insider pointed out that the exit strategy would be more easily understood by market participants if it were gradually implemented. He gave an example that even a very small range of interest rate adjustments would engender some form of sense to change policies for people. However, if the exit policy had sufficient communication with markets accompanied by a gradual exit strategy, the impact on the market would be minimal.

By People's Daily Online
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