Cautious policy needed

Updated: 2011-12-12 16:09

(China Daily)

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Policymakers charting China's monetary and fiscal policies for 2012 at the Central Economic Work Conference, which starts on Monday, should not ignore the strong headwinds blowing both inside and outside the country.

They must be prepared for a weakening domestic economy and volatile external environment, especially in Europe, which is China's largest trade partner.

The weekend agreement reached in Europe, which offered temporary relief to global investors and those worried about a potential collapse of the euro, remains a far cry from a fiscal union that will prevent the European crisis from happening again.

That means the turbulence in the European financial markets and its effects on the real economy will continue next year, which will affect the demand for Chinese exports.

Data from last week points to a weakening, if not faltering, economy in China. Industrial output dropped to its slowest pace in two years in November, while in the same month exports increased 13.8 percent year-on-year, the lowest growth in nine months.

It is therefore understandable that the central leadership emphasized the need for "foresight" on Friday, so the conference will likely prioritize a pro-growth stance and a more flexible proactive fiscal policy and prudent monetary policy.

Certainly it is unavoidable that the world's second largest economy will become bolder in carrying out stimulus policies to keep its growth on track if the external situation continues to worsen next year.

While European countries will struggle to hammer out a final agreement by March, the US economic recovery, despite perking up slightly recently, is still very fragile.

Emerging-market economies are also going flat, India and Brazil also performed disappointingly in the third quarter, reducing the possibility of China shifting its exports from crisis-laden Europe to emerging economies.

However, there is no need to rush to loosen policies as growth remains in the comfort zone, it reached 9.1 percent year-on-year in the third quarter of this year. So a "targeted" loosening is advisable, especially as loose monetary conditions could easily trigger inflation again.

But the economic situation often changes unexpectedly fast, as shown by the sudden slump in growth at the beginning of the global financial crisis, from more than 10 percent in the second quarter of 2008 to 6.5 percent in the first quarter of 2009.

That crisis was a severe test for policymakers, as many enterprises were sandwiched between monetary tightening and the slow reaction of the authorities and went bankrupt.

This time, it is a must that policymakers monitor the internal and external situations more closely and take prompt action if anything unexpected happens next year.