In 2008, the subprime mortgage crisis escalated into a global financial crisis, drawing an increasing number of economies into its vortex and pushing the overall global economic situation toward a more severe state. Under these circumstances, China’s macroeconomic performance in 2008 was complex and multifaceted. To boost economic growth, we proposed a macroeconomic recovery strategy characterized by an “√-shaped” recovery trajectory. We believe that at this stage, it is essential to fully implement a macroeconomic regulatory framework featuring proactive fiscal policies and moderately accommodative monetary policies. The related policy measures should not only focus on “safeguarding growth” but also—crucially—timely and appropriately “promote structural adjustments,” thereby combining efforts to overcome the impact of the crisis with the goal of achieving long-term sustainable development.

China’s economic growth is currently in a downward phase at the “turning point” of its growth rate. As the pace of economic growth slows, various contradictions and problems that had been masked by rapid economic expansion are now coming to light. Coupled with the accumulated issues left over from the period of high-speed growth and the challenges posed by external economic factors, China’s overall macroeconomic environment has begun to experience fluctuations and even faces mounting pressure toward recession. To ensure rapid and stable economic growth, in accordance with the requirements of the Central Economic Work Conference held in December 2008, China has introduced a macroeconomic regulation framework anchored by proactive fiscal policy and moderately accommodative monetary policy. This framework represents a scientifically sound formulation and operational principle for a “dual-loose” policy mix tailored to China’s current economic situation. From the perspective of policy effectiveness, it will help propel the economy toward a “V-shaped” recovery.

I. The Basic Framework of the Macro-Regulation Policy System

2008 was a year marked by exceptionally sharp economic fluctuations and sudden, dramatic changes in the economic landscape. The objectives of macroeconomic regulation also underwent an unprecedented three shifts within the year—from “dual prevention” to “one safeguard and one control,” and then to “safeguarding growth.” Policy responses continuously adapted and adjusted in step with the ever-changing economic situation. By the end of 2008, China’s macroeconomy had entered a downward phase at the “turning point” of its growth rate. With “safeguarding growth” as the primary goal, a basic framework for macroeconomic regulation emerged, underpinned by proactive fiscal policy and moderately accommodative monetary policy.

In terms of policy orientation, a moderately accommodative monetary policy shoulders the responsibility of improving the economic operating environment and providing “energy” for growth. The policy’s key focuses are as follows: First, to mobilize positive market forces, restore market vitality, and enhance the economy’s resilience and self-repairing capacity; second, to create a favorable environment and provide the necessary space for the implementation of proactive fiscal policies—thereby reducing the implementation costs of these policies and, by boosting the “multiplier effect” while minimizing “crowding-out,” ensuring their effectiveness; third, to offer support and convenience in overcoming economic problems and contradictions. Meanwhile, the new proactive fiscal policy serves as the direct driving force and engine behind rapid economic growth. Its primary regulatory focus is, first, “safeguarding growth”—making every effort to pull the economy out of the “quagmire” of critical recession risks; second, “promoting adjustment”—providing a more advanced model and foundation for a new round of economic growth; third, “advancing reform”—by bearing the costs of reform and offering support, thereby pushing forward reforms in relevant sectors, optimizing economic operating mechanisms and models, and alleviating various conflicts and tensions during the economic downturn; fourth, “ensuring and improving people’s livelihoods.” This is not only the goal of the policy but also its very essence. Adhering to the principle of “ensuring and improving people’s livelihoods” will provide our proactive fiscal policy with the most solid operational foundation and the most reliable value benchmark, align macroeconomic regulation with the requirements of the Scientific Outlook on Development, and ensure that our future economic prospects are fully consistent with the fundamental interests of the broadest masses of the people.

II. Recommendations for Implementing a Moderately Loose Monetary Policy

The policy considerations behind a moderately accommodative monetary policy hinge on the two characters “shi” and “du.” “Shi” refers to the appropriateness and suitability of policy measures and implementation plans—meaning that these measures should enable policy objectives to be achieved at low cost and with high efficiency. “Du” refers to maintaining the intensity of policy within an appropriate range: although policy overshoots are hard to avoid, we must also refrain from allowing policy implementation to become excessively lax. Based on the responsibilities, nature, and functions of a moderately accommodative monetary policy within the macroeconomic regulation framework, we propose the following recommendations for the current implementation of such a policy:

1. Interest Rate Policy. The interest rate is an important value signal in a market economy. It represents the time value of money, serves as a measure of the cost of investment, and is a key factor determining the allocation between savings and capital. Under conditions of an export-oriented economy, the level of interest rates also plays a crucial role in shaping exchange-rate trends. Looking at China’s situation, the central bank cut interest rates four times in 2008. Currently, the deposit rate stands at 2.25%, while the lending rate is 5.31%. In nominal terms, China’s interest rates are higher than those in the United States, Japan, and the European Union (including the Eurozone and the United Kingdom), leaving some room for further reductions.

Since loan interest rates have a direct impact on market investment and the choice of capital allocation, we recommend continuing to significantly lower loan interest rates in the first half of 2009 to rekindle investment demand, safeguard the value of assets such as real estate and securities, and maintain macroeconomic stability. We also suggest further reducing deposit interest rates—on the one hand, to align with the low-interest-rate levels prevailing in major global economies and help maintain the RMB exchange rate at a normal level; on the other hand, to provide a favorable environment and room for the implementation of proactive fiscal policies. Given the current state of development of China’s banking sector and the upward trend in non-performing loans since the financial crisis, we still recommend maintaining the net interest margin between deposits and loans at around 3 percentage points to ensure financial market stability.

2. Exchange Rate Policy. The exchange rate is the ratio between two currencies. Under conditions of an open economy, the exchange rate has a significant impact on trade, investment, and international financial markets. Since the reform of the RMB exchange rate in July 2005, the overall trend of the RMB exchange rate has consistently been toward appreciation. This strong market expectation of appreciation, coupled with a slow-paced appreciation policy, has brought about a series of adverse effects on China’s economy.

Judging from the current situation, the RMB remains stable against the U.S. dollar. 6.83 By the way, this exchange rate is slightly lower than the one announced by Jiangsu Province. 65 The average foreign exchange cost for key textile enterprises—given the need to maintain macroeconomic stability and promote employment—is recommended to be actively guided toward lowering the exchange rate in the foreign exchange market. 6.93 On the one hand, and on the other, by bolstering domestic reserves of resources and energy through the purchase of bulk commodities, we can hedge against upward pressure on the exchange rate, thereby maintaining the stability of the RMB exchange rate over the longer term and creating favorable external conditions for enterprises to expand their exports.

3. Money supply. The central bank’s issuance of base money provides a high-powered money supply, which directly affects market liquidity. Judging from the current situation, liquidity within China’s financial system is relatively ample; however, due to factors such as heightened market uncertainty and banks’ reluctance to extend loans, this liquidity has not been effectively transmitted to the market.

We do not recommend significantly increasing the money supply. The liquidity currently trapped within the financial system can be guided and released through fiscal interest subsidies and partial compensation measures. Given the current situation, excessively expanding the money supply would not only make it difficult to ensure the effectiveness of policy measures but could also lead to severe inflation after the crisis or exacerbate the crisis by triggering “stagflation.” We believe that the growth rate of the money supply in 2009 should be kept within 17%.

4. The reserve requirement ratio. The reserve requirement ratio is an important tool used by the central bank to guide and regulate the liquidity of commercial banks. Strictly speaking, as a financial stability instrument, the reserve requirement ratio carries greater significance than its role in economic regulation. In 2008, China lowered the reserve requirement ratio three times. Judging from the current situation, there is still considerable room for further reductions in the reserve requirement ratio. However, given the reserve requirement ratio’s critical role in ensuring financial stability, we recommend using this tool with caution.