As a leading economy in Asia, China should adopt a timely, flexible, well-tailored and more forward-looking macroeconomic policy. Amid signs of its economic deceleration and the increased risk of imported inflation following the adoption of QE3 in the US, China will face an uphill task in effectively implementing its fiscal and monetary policies aimed at maintaining stable growth.
China needs a flexible regulatory policy, and quantity-dominant regulatory means should be employed as much as possible to hedge against liquidity and prevent a rapid appreciation of local currencies. They should also maintain measures to curb inflation and real estate bubbles. Effective measures should also be taken to stabilize the yuan's exchange rate and reduce appreciation expectations. Reform of the yuan's exchange rate regime should be carried out in an active but controlled manner, and monitoring should be strengthened over the inflow and outflow of international capital. Harsh penalties should be enforced against unregulated flows of transnational capital in a bid to prevent their large-scale inflow and outflow, especially to prevent them from flowing to the housing and stock markets.
The mainland and Hong Kong monetary authorities should strengthen cooperation in financial monitoring. Under the current financial framework, Hong Kong is usually regarded by international hot money as a transfer center for movement to the mainland. The recent depreciation of the Hong Kong dollar and the rise of its asset prices are a result of the increased inflow of international hot money to the region. Maintaining stable exchange rates and avoiding a rapid rise in asset prices will help the Chinese mainland and the SAR forestall the speculative inrush of international capital.
As a fundamental way of stopping the excessive inflow of international hot money, China should accelerate the pace of the yuan's internationalization to reduce the negative effects brought about by the US dollar's hegemony and unrestrained liquidity. At the same time, China should make adjustments and perfections to its monetary and exchange rate policies.
China's continuous and large-scale purchases of the US dollar over the past decade in a bid to maintain the stability of the yuan's exchange rate has added pressures to domestic inflation. This has caused doubts about the necessity of China continuing to peg the yuan to the dollar. The dollar-pegging exchange rate policy will plunge China into a particularly passive position if the US continues to loosen the screws on dollar issuance.
The author is a professor with Shanghai-based Tongji University.
Landmark building should respect the public's feeling
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