Loosening should meet market needs

China's consumer price index rose by a scant 0.8 percent in January, down from a 1.5 percent increase in December and marking the smallest increase in consumer prices in some five years. Meanwhile, monetary policy decisions in the US and Europe have amplified uncertainties for China and the rest of the world. Understandably, many are concerned about the global spread of deflation.

Some believe the best way to address such concerns is through a loosened monetary policy stance based on low interest rates and slashed reserve requirements. Since November though, the market has taken a mixed view of the People's Bank of China's targeted efforts to spur lending and enlarge credit availability. Effective monetary policies should meet the requirements of actual economic conditions.

Due to current economic conditions in China, it is widely believed that financial policymakers will reduce interest rates and banks' deposit cushions again in the first half.

Such an outcome would lead to wider fluctuations in the yuan-dollar exchange rate. Further exchange rate reforms should be based on the demands of foreign trade and allow space for additional policy adjustments.