All modern economies struggle with the inconsistency between sharp and volatile short-term price movements in financial markets and more gradual long-term structural adjustments in the real economy. Unlike in the past, when Chinese policymakers were able to concentrate on the real economy without worrying about excessive financial-market instability, they now must manage short-term volatility caused by liberalized interest and exchange rates, together with larger and faster capital flows both within and across borders.
For China, coordinating short-term Keynesian fiscal and monetary policies aimed at stabilizing markets with long-term changes to the industrial structure – all without allowing growth to fall low enough to disrupt expectations – will be no easy feat. But one thing is clear: effective communication with market participants and real-economy players is crucial to market credibility and stability.
In relatively closed economies, explaining complex policies is less important than delivering results. But with increasing foreign participation and interaction, maintaining stability means anchoring market confidence with transparent, credible policy-making and action.