'Too big to fail' may be the lesser of two evils

In spite of the obvious necessity and the long-term benefit of China's efforts to rebalance its economy from manufacturing and exports to services and consumption, the Organization for Economic Cooperation and Development indentified the emerging market's slowdown and drop in trade as the main factors clouding the global outlook in its latest twice-yearly Economic Outlook.

Moody's latest Global Macro Outlook report also pointed out this week that the main risks to the economic outlook stem from a bigger than expected global fallout from the Chinese slowdown and a larger impact from tighter external and domestic financing conditions in other emerging markets.

The sluggish Chinese growth figures are shaking global stock markets as frequently, if not more, than US rate hike fears. But such worries are largely misguided, for it significantly underestimates both the large contribution that China is still making to the global growth and the huge underlying growth potential China's ongoing structural reforms will release.

So while greater ambition by G20 countries in supporting demand and pursuing structural reforms to boost potential growth will be much needed, international caution against the consequence of too much cheap money may be even more urgent.

On one hand, the current economic woes of many developing countries have a lot to do with the flow of international capital which is largely beyond their control but heavily influenced by major developed countries' zero interest rate policies.

On the other hand, if bankers' greed for profits and bonus is blamed as a key cause of the 2007 to 2009 financial crisis, central bankers will be held accountable for the current oversupply of cheap money that may seed dangerous global asset bubbles that the world's largest banks can hardly withstand whatever the buffer.

In this sense, the G20 leaders should never make do with the fact that the financing capacity to the real economy is being rebuilt and significant retrenchment from international activity has been avoided with several years of cheap money. If they are to fix the banking system and shore up the real economy, they must start with dealing with the painful consequence of getting rid of the addiction to cheap money.

The author is a senior writer with China Daily.

zhuqiwen@chinadaily.com.cn