China has already adopted a prudent monetary policy to address inflation, the main threat to its economy, driven mostly by food prices, in particular pork prices. However, it should be noted that the deep-rooted cause of the country's inflation also lies in structural problems. During the middle stage of industrialization, the price pressure of agricultural products, energy products, fundamental productive elements, such as land and the labor force, even real estate and other assets, will be a feature of our lives. Monetary policy is not enough to tackle these issues.

Rising prices are a big concern for many Chinese households, and finding ways and means to let average people enjoy a larger share of China's development fruit will present a big challenge. This transfer of income, along with narrowing the gap between the rich and the poor, means transferring economic gains from companies to consumers, cities to countryside, and savers to spenders.

The current situation is so complicated that it requires a flexible and effective response. Across the US, Europe and Asia, purchasing managers reported worryingly feeble activity in the manufacturing sector, with new orders shrinking. China's official purchasing managers' index (PMI) fell to a 29-month low of 50.7 in July, indicating that the Chinese economy is likely to weaken further. Also, the China PMI run by HSBC, which focuses more on SMEs, has already fallen below 50.

The latest GDP figure is for the large part the result of credit-led massive investment in the past two years, and the current worsening of the global economic environment could be reflected in China's economy in 2012 and beyond

It is also worth mentioning that the ability to address the next crisis and next recession may be much weaker than a few years ago, for the government's fiscal policy and monetary policy appear to be reaching their limits.

Right now the global monetary and financial conditions remain unusually accommodative, so it is time to normalize monetary policy. For different countries, this means different things. The US should refrain from launching QE3 and tighten its monetary policy to raise the world's confidence in the value of the dollar. China should be ready to closely monitor the delayed effect of its monetary tightening and carefully assess the synthetic impacts of a comprehensive policy package on the economy.

Few people deny there are many uncertainties ahead, but one of certainties is that the global recovery will be slower than most expected.

There is no easy way out of the recession, and no painless solution to deal with the structural imbalances. Policymakers in both developed and developing countries must focus on structural reforms no matter how tight or loose the monetary policy is.

The pain of reform is immediate and the payoff in the future, but it is better to pay modest costs today, in order to avoid much larger costs tomorrow.

(China Daily 08/17/2011 page8)