Beijing and the world's leading central banks have separately eased liquidity amid fears of a global slowdown. Economic indicators show the cooling of China's own economy, including manufacturing activity, is gathering pace, partly because of flagging demand from debt-stricken Europe. Policymakers have cut the proportion of deposits that banks must hold in reserve with the central bank. The move has been seen as a sign that China has begun a progressive easing of its monetary policy. But it could still be too early to say that. State leaders may well feel more relaxed about inflation and a property market bubble, but a move towards loosening that was not expected until next year also reflects concern about slowing global growth.
Inflation is expected to have fallen to less than five per cent last month, from 6.5 per cent in July. And tighter conditions have taken some heat out of the property market as cash-strapped developers slash prices. But there is still need for caution in relaxing monetary policy. Asset bubbles, for example, are still there. Premature loosening could cause even bigger problems, compounding external pressures on growth. If it is not yet time for a fundamental shift in policy, Beijing should continue to adjust macroeconomic policy as it did this week.
Growing fears of economic turmoil in Europe have spurred co-ordinated action by the US Federal Reserve and other central banks to slash the cost of dollar liquidity, which will mean cheaper dollar loans for European commercial banks. The joint effort shows how serious the situation is. While it may have cheered markets, it can only provide breathing space. Analysts and world leaders from China to the US to Australia have repeatedly called on European leaders to tackle the fundamental issues behind the euro zone's sovereign debt crisis and necessary reforms. If they make progress this could clear the way for the European Central Bank, a key player, to step up purchases of government bonds and, hopefully, restore confidence to financial markets. Germany, the strong man of Europe, continues to be the main stumbling block to decisive ECB intervention, because of resistance to what would effectively be a bailout of less disciplined members of the single currency zone.
Among all the efforts to persuade Germany that to do so would be in its own best interests, one from Polish foreign minister Radoslaw Sikorski stands out. Poland, now president of the council of the European Union, has a history of suffering aggression and domination by more powerful neighbours, including Germany. Sikorski told a German audience this week that the biggest threat to the security and prosperity of Poland now was the collapse of the euro zone. As a result, he feared German power less than he feared its failure to act. The rest of Europe can empathise with that call for action.
