(worldbank.org)
Updated: 2008-02-18 11:00

Macroeconomic Policies

In light of these developments and prospects, the three key macroeconomic issues that policy makers have to deal with are:

The likely impact on China of the prospective global slowdown: China is well-placed to deal with a contained global slowdown, but in the case of a more pronounced global slowdown and impact on its economy, China is in a strong macroeconomic position to stimulate demand.

Inflation: So far there is limited spill over of higher food prices into more generalized inflation and no obvious overall excess demand yet. Economic policy makers need to ensure this remains the case and that inflation expectations remain contained. This calls for relatively tight monetary policy (details below) and effective communication, while exchange rate policy also matters. The government has also implemented administrative measures (details below) including some price controls, and it could consider using direct subsidies.

The continued large balance of payment surpluses that inject liquidity into the economy.

Inflation concerns and balance of payment surpluses have implications for monetary and

exchange rate policy, and administrative and fiscal measures:

Monetary and exchange rate policy:

With monetary policy remaining constrained by the exchange rate policy,

administrative measures continue to play a role in monetary policy.

Looking ahead, monetary policy may continue to rely on credit controls and liquidity

management.

The authorities have speeded up the pace of appreciation against the dollar.

Administrative and fiscal measures:

The government has introduced several administrative and fiscal measures to dampen price rises, keep items affordable, and manage expectations.

As the government may consider additional measures, there are several observations to make. How do these general considerations help in deciding what to do if food price pressures intensify?

Under current circumstances, price controls have short term benefits and costs.

In the longer run, the detrimental incentive effects are likely to outweigh the benefits.

Thus, administrative measures such as price controls and quotas should be used sparingly and should not be relied on for long periods of time.

Short-term considerations should not distract from the strategic direction of reform.

Given the government’s strong fiscal position, the authorities could consider introducing direct subsidies.

To minimize costs and keep subsidies justifiable, direct subsidies are, if practically possible, best targeted at the most needy groups.

The use of administrative and fiscal measures should be flanked by consistent

macroeconomic policies.

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