China’s options ahead
In coming months, China must act to convince market and economic
participants that it has control over the policy tools needed to maintain a
stable operating environment for its economy. In short, the government
must ensure that the capital outflows it is experiencing will not trigger a
balance-of-payments crisis. The task of stabilizing flows is not as gargantuan
as it may seem, as there are important automatic stabilizers in the
economy, described below. However, to ensure stability, some current policy
objectives, such as stabilizing the stock market, should be abandoned, and
further policy missteps must be avoided. China’s policymaking is entering a
tricky new stage, hindered by some loss of credibility recently as the government
rigidly pursued its objectives. The conundrum that policymakers face