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A Crisis Policy Exit Plan in Two, Easy Steps

10-30 08:58 Caijing

Since a quick stimulus exit and credit clampdown appear unlikely, China's policymakers should consider backing off gradually.

By Shen Minggao

(Caijing Magazine) China's early and robust recovery from the world's economic crisis was due in large part to skyrocketing credit lending over the past 12 months. Huge uncertainty during the global financial and economic turmoil demanded a forceful policy that was allowed to overshoot.

Now that statistics show China's GDP growth passed the 8 percent threshold in the third quarter, there is window for the country's economic policymakers to realign the policy goal and switch from "ensuring growth" to "managing inflation expectation."
Managing inflation expectation doesn't mean stimulus policies are bound to exit, or that economic measures should immediately be brought to standard levels. In terms of the economy, 2010 will never be a normal year for China. The reasons follow:

First, although the world's major economies have shown signs of recovery, these are fruits of policy stimuli. There haven't been any significant structural adjustments or any new areas to power economic growth in the foreseeable future. So a hasty exit of stimulus policies might end the current, fragile recovery.

Second, "path dependency" will mark next year's monetary policy. Massive loan-writing this year -- especially mid- to long-term loans whose share of total lending increased rapidly – has sown seeds for a high loan demand in the future. A speedy withdrawal of lenders would leave many projects half-completed and send non-performing loan ratios higher.

We should take a two-step approach to end expansionary lending policies, first by shifting from extraordinary to normal stimuli, and then moving from stimuli to non-stimuli.

In that sense, "managing inflation expectation" should be part of the first phase, which would shift monetary policy from "extremely loose" to "moderately loose," and maintain credit growth above 20 percent, which would still be higher than the 15 to 18 percent levels recorded in normal years.

The second step -- exit -- is more complicated. If there is no structural change in China's economic model, an end for easy money will certainly slow economic growth. To prevent that from happening, the Chinese government must avail itself of structural changes to spur new economic growth.

For China, new growth does not necessarily have to revolve around novel technology or heavy investments. Rather, developing the service sector alone could achieve the necessary results.

There is only one possible trigger for a rapid credit exit next year: A higher-than-expected inflation rate that forces the government to tighten its grip on lending. If that happens, another economic slowdown will be inevitable.

China will once again have to manage a subtle balance between ensuring growth and preventing inflation in the coming year by changing, or not changing, its macroeconomic policy.

Shen Minggao is chief economist for Citibank's Greater China Region and a former Caijing staffer.

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