Chapter 3 Macroeconomic Policy in an Open Economy
Lead-in
China will encourage its financial institutions to make interest concessions as appropriate to businesses to help keep economic fundamentals stable, and ensure that all fee-cutting measures are fully executed on the ground in an effort to ease corporate burdens.A host of policy steps were decided upon at the State Council’s executive meeting chaired by Premier Li Keqiang on June 17, 2020.
Enterprises, particularly smaller ones, have been hit hard by COVID-19, and the Chinese government pays close attention to helping them overcome the difficulty.Premier Li Keqiang pointed out that fiscal and financial measures should be fully employed to help small and micro businesses survive, and encouraged banks to step up support as companies strive to stay afloat.
To advance stability on the six fronts and security in the six areas, the Wednesday meeting underlined the need for stronger monetary and financial policy support to the real economy, and help tide smaller businesses over difficulties as financial institutions and the businesses who borrow from them have a stake in each other’s success.
By lowering the reserve requirement ratio (RRR), increasing re-lending and re-discount quota and deepening the loan interest reform, the amount of new RMB loans made between January and May has seen significant increase over the same period last year.Overall financing costs faced by companies trended downward.
Stronger efforts were urged to bring down the lending and corporate bond rates, make concessional-rate loans, defer loan repayment for micro, small and medium enterprises, and support the issuance of un-collateralized loans to small and micro companies, reduce fee-charging from banks.
The meeting called for better leveraging such policy tools as RRR cuts and re-lending to keep liquidity reasonably sufficient, and intensifying efforts to make financing more accessible for enterprises and help them tackle the financial woes.The goal this year is for both new RMB loans and aggregate financing to expand more than last year.
The newly increased funds should be funneled into manufacturing and the service sector, especially smaller companies therein, to provide the much-needed relief to enterprises in times of hardship.The funds are also expected to make financial institutions more motivated and better equipped in serving the needs of smaller firms.
The capital funds of small and medium banks will be replenished as appropriate.Banks are urged to improve their internal evaluation and incentive mechanisms, and raise the weight of inclusive finance in the performance evaluation.
Non-performing loans will be dealt with more effectively.No unwarranted extra conditions should be imposed in loan extension.Meaningful progress must be achieved to make lending more accessible and affordable for market entities.
The Wednesday meeting required full delivery of all fee-cutting steps introduced this year.The policy of reducing electricity prices for general industrial and commercial businesses by 5 percent, and reducing or canceling civil aviation development fund contributions and port development fees will be extended to the end of this year.The rates for broadband and dedicated internet access services will be cut by 15 percent on average.Together with the fee cuts made in the first half of this year, these measures will save enterprises over 310 billion yuan (about 43.7 billion U.S.dollars)for the whole year.
Source: Xinhua, June 18, 2020, http://www.xinhuanet.com/english/2020-06/18/c_139148 078.htm
In this chapter we shall be examining how both exchange-rate changes and macroeconomic policies impact upon an open economy.A fundamental difference between an open economy and a closed economy is that over time a country has to ensure that there is an approximate balance in its current account.This is because no country can continuously build up a stock of net liabilities to the rest of the world by running a continuous current account deficit.Conversely, it does not make sense for a surplus country to continuously build up a stock of net claims on the rest of the world; eventually it will wish to spend those claims.
The need for economic policy-makers to pay attention to the implications of changes in monetary and fiscal policy on the balance of payments is an important additional dimension for consideration in the formulation of economic policy in an open economy.Ensuring a sustainable balance-of-payments position over time is an important economic objective to go along with high economic growth, low unemployment and low inflation.