Policymakers around the world need to work together to stimulate real economy and rein in price distortions

It is obvious that the Chinese economy and world economy are both declining and adjusting. Enterprises are hesitant to invest and market consumption is weak, and the "bailout" capital, at home and abroad, has not yet entered the real economy.

Both developed economies and emerging markets are being adversely affected by the decline. The shrinking trade and investment, weak stock markets, and the big swings in market confidence, are all testimony to the lack of a coordinated bailout plan among all economies.

The quantitative easing introduced by the US Federal Reserve, the capital injection of the European Central Bank, and the Chinese government's possible adjustment of monetary and fiscal policies have been effective means of stimulation, but their effects are only temporary and quickly dissolve, failing to reach the real economy or stimulate consumption.

The lack of coordination among policymakers around the world means price distortions prevail in both developed and developing countries and these are hampering the global recovery.

Speculation in scarce resources has run wild. This has increased the costs of "reindustrialization" in developed economies. As a result they have resorted to protectionism to relieve the influence of price distortions on their economies.

All countries should support free trade and let the true demand of the real economy play a bigger role in adjusting price levels.

Selfish and shortsighted protectionist measures and bailout policies will only further distort prices, which will make the global recovery more complicated and increase the costs for all nations.

Meanwhile, the markets, over-dependent on the stimulation packages of governments, lack vigor. If the authorities disappoint the markets by failing to obtain the expected results, the pessimism of the markets will be another drag on the global economic recovery. Previous efforts only avoided a hard landing for the world economy without restarting new growth.

The upcoming presidential election in the United States is also aggravating uncertainties. So people are saving money, which is affecting both the real economy and consumer demand. Meanwhile, the prices of short-term bonds have risen sharply and the prices of staple commodities are fluctuating wildly.

In China, product prices have risen at a slower rate than the cost of services and labor, which has increased production costs for enterprises. And the excessive liquidity in Europe, the US and Japan has forced their currencies to appreciate against the yuan, deteriorating trade conditions for Chinese enterprises and offsetting the partial recovery of Chinese manufacturing industry's competitiveness. As a result, enterprises are only making short-term investments in order to maintain a certain level of cash reserves during this difficult period.

The Chinese government should try its best to lower enterprises' production costs so as to cushion the slowing economy's influence on the real economy.

If China loosens its monetary policy, the rising prices of land, raw materials and consumer commodities will further increase the costs for enterprises. So it is more rational to use taxation and industry policies, instead of monetary policies, to stimulate the real economy directly. Some governments in the West are cutting taxes for enterprises, and this is what we should do now. We should not push enterprises too hard to upgrade their industries.

However, China needs to have enough room to tighten its monetary policy so it will be able to manage the imported inflation when the excessive liquidity of the West hits the world economy. If it does not adjust its monetary policies, especially the deposit reserve ratio, the Chinese economy will be trapped in "stagflation", which will have a serious impact on the global recovery.

Monetary policies are caught in the "liquidity trap". Further stimulation only increases the likelihood of excessive liquidity in the future.

Only when the nation's decision-makers can effectively contain overseas speculative capital, avoid sharp rises in the prices of staple commodities and agricultural products, and let banks allocate capital more rationally among cash-hungry enterprises, can we increase liquidity prudently by lowering interest rates and the deposit reserve ratio.

The author is vice-dean of the School of Economics at Fudan University.