Tags: Roach | Central | Banks | China

Stephen Roach: Central Banks Should Learn From China

Wednesday, 07 March 2012 08:13 AM

Economist Stephen Roach says central banks should learn from China's policies.

"Even after premier Wen Jiabao’s latest warning over a moderate slowing of growth, it is doing a far better job in managing its economy than most give it credit," Roach writes in the Financial Times. "It even offers some lessons in macro policy strategy that the rest of the world should heed."

China, Roach says, is cut from a very different cloth than the advanced economies of the west. Long focused on stability, it is more than willing to accept the short-term costs of a growth sacrifice to keep its development strategy on track.

Nowhere is that more evident than on the inflation front, where Chinese authorities have waged a very successful campaign against what has long been the nation’s most destabilizing economic threat, says Roach.

"After peaking at 6.5 per cent in July 2011, the headline consumer price index (CPI) has decelerated to 4.5 per cent in early 2012, with more disinflation likely in the coming months," he observes.

"This reflects the impacts of three very deliberate policy actions taken by Beijing."

Those policies, Roach says, were managing agricultural bottlenecks, raising required reserve ratios for banks and raising interest rates.

The results were that food inflation peaked at 15 percent in mid-2011, bank loan growth decelerated and underlying inflationary pressures eased significantly.

“This three-pronged approach – in conjunction with a modest acceleration in renminbi currency appreciation – is an important example of China’s increased prowess in macro policy stabilization,” says Roach.

By taking its policy rate – the one-year benchmark lending rate – up to the peak headline inflation rate of 6.5 per cent last northern summer, the People’s Bank of China not only ended the excessive accommodation imparted by negative real interest rates but it was then able to orchestrate a “passive” monetary tightening – allowing real short-term interest rates to climb to 2 per cent as administrative actions took food price and headline inflation lower in the second half of 2011.

“This is classic central banking at its best,” Roach says. “China now has plenty of ammunition in its monetary policy arsenal – namely, high required bank reserve ratios and positive real short-term interest rates – to deploy as circumstances dictate.”

“In contrast, the U.S. Federal Reserve, the European Central Bank and the Bank of England are out of traditional ammunition. They have followed the Bank of Japan and taken their short-term policy rates down to the zero bound.”

The Wall Street Journal reports that U.S. stocks fell and commodities tumbled after Federal Reserve Chairman Ben Bernanke took a cautious view of the U.S. recovery but offered few clear signals that the central bank could take additional measures to ease policy.

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