No sharp turns

The Government Work Report this year said that China will carry out the task of ensuring the continuity, consistency, and sustainability of macro policies to keep major economic indicators within an appropriate range.

"We will avoid sharp turns in policy; instead, we should make adjustments and improvements based on new developments to reinforce the fundamentals of the economy," the report said.

In its fourth-quarter monetary policy implementation report, the People's Bank of China, the central bank, said it will consolidate the achievements of loan interest rate cuts in real terms.

The Government Work Report said China will further lower loan interest rates in real terms, which is slightly different from the expressions in the PBOC report. It shows that the turn in monetary policy may be slower than market expectations.

Zhang Bin, senior fellow at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences:

In January, the consumer price index, the main gauge of inflation, fell 0.3 percent from a year earlier, and the producer price index rose only 0.3 percent year-on-year. Even if the rise of the indexes will accelerate to some extent, the increase will be limited.

In sub-indices of the Manufacturing Purchasing Managers Index, the employed person index dropped 1.2 percentage points from the previous month to 48.4 percent in January. A reading below the 50-point mark separates growth from contraction.

These numbers show that there is still some distance to go for China to realize the main goal of monetary policy, which is to achieve moderate inflation and full employment. Therefore, China's monetary policy should remain relatively loose in the short term.

The major risk that we need to pay close attention to is that macroeconomic performance can't return to normal for a long time or may even fall into a double-dip recession. In addition, the rise in nonperforming loans at financial institutions and the increase of defaults in financial markets also deserve our attention.

The Government Work Report said China will enhance the quality, efficiency, and sustainability of its proactive fiscal policy. The direction of fiscal policy reforms will shift toward increasing budgetary expenditure while controlling and reducing off-budget expenditure that is actually led by local governments, especially non-public welfare expenditure, in an orderly manner.

Policymakers should coordinate monetary and fiscal policies. In the current economic environment, China should keep its interest rates at a fairly low level to reduce fiscal pressure.

The government should often use standard macroeconomic policy instruments, including interest rate and budgetary fiscal policies, and control well the use of certain policy instruments like borrowing via local government financing vehicles.

Multiple measures need to be taken to defuse hidden debt risks of local governments. For example, China should adopt a more proactive monetary policy, which will make greater contributions in terms of ensuring growth and securing employment, while maintaining the appropriate strength of budgetary expenditure to reduce the pressure on local government borrowing with the aim of ensuring growth.