Ma has a good point on Chinese monetary policy

Comments on Guonan Ma "A compelling case for Chinese monetary easing", 13/07/2015

It is regrettable that the deleveraging process earlier on and the response to the possibly excessive fiscal in the wake of the GFS took a rather mechanical approach in China, particularly in the global context of extremely easing monetary policies in the major economies as Dr Ma has mentioned. That mechanical approach reflected either inexperience or some silly ideological approach by some advisors or policy makers.

Further there was a weaker external demand and macro policies should have been aimed at stimulating domestic demand, including either or both of monetary and fiscal policy tools. I have elsewhere argued that there is an issue of optimisation even when dealing with excess capacities, as opposed to simply tightening in both monetary and fiscal policies.

On one point, though, I would not necessarily agree with Dr Ma, that is, the role of the PBoC in credit allocation. It appears that China's approach to financing housing market with a differential approach to first and other residential properties is commendable.

On the contrary, in most west advanced economies, there is a lack of monetary tools apart from the economy wide and market agent wide tool, that is, one interest rate for all, reflecting the weakness of their approach to monetary policy of being unable to deal with the requirement of more than one tasks. In that regard, China's differential approach is superior in my view.

We need more tools to deal with more tasks. The Chinese approach, in principle, is in the right direction. Of course, there is a degree or limit to that approach and one cannot expect all problems can be solved through monetary policies.

Having said that, the exact way the Chinese authorities has managed its stock market over the past year or so has created the problem of moral hazard and is not commendable at all. It should not have intervened as it has done, creating a bubble and then trying to sustain the bubble.