As 2015 ushers in a new spring, economic indicators show no signs of warming up. China’s GDP growth rate was only 7.4 percent in 2014, the lowest since 1990. The growth of nationwide power consumption, a key indicator in the “Keqiang Index,” was minimal; railway cargo volume was down by 3.9 percent; the consumer price index and producer price index also reached their lowest points since November 2009. Worse still, several provinces registered negative growth rates. Liaoning’s industry production growth rate, for example, was down by 4.5 percent.

From a macroeconomic perspective, this is a result of monetary contraction. As statistics reveal, as of the end of 2014, China had 122.84 trillion yuan ($19.99 trillion) in broad money (M2), but most of it was derivative money. This means that the monetary base — currency with real value and usefulness — was only 32 trillion yuan ($5.21 trillion), and at the end of December last year, China’s balance of domestic and foreign currency deposits was 117.37 trillion yuan. So even with a bank reserve ratio at just 18 percent, China still had 20.2 trillion yuan of frozen money, or 32 percent of the country’s 32-trillion-yuan monetary base. This ultimately means that 63 percent of China’s currency is slumbering in the central bank and not in circulation. This is the root cause of China’s money shortage in recent years.

China has tightly controlled currency largely out of fears of even higher housing prices. Right now, though both housing prices and property sales are experiencing slowdowns, the population’s demand for housing is by all means still considerable. That demand is just temporarily suppressed by the formidable prices today.

In times of monetary tightening, fiscal leverage becomes the last resort for economic growth, but fiscal means are not always the best means. The enormous potential of China’s private economy seems to offer the better solution to the biggest problem China faces today, which is lack of investment in many of the most promising industries. If China were to lower its use of fiscal leverage, private investment would have to be engaged, rendering monetary easing an inevitable course of action.

Lower interest rates may partially lower financing costs, but they will not make a significant difference because the problem lies not in high interest rates but in the shortage of currency in circulation, an excessively large proportion of which is frozen in the central bank. Commercial banks are no exception to this shortage, and when banks have little, the private sector has none.

The channels for transferring money from financial institutions to businesses have in fact never been blocked. With multiple financial reforms and the rise of Internet finance, such channels have actually become more open and diverse. So what is causing this “drought” in the real economy?

Fundamentally, it is the scarcity of currency that drives up prices rather than the central bank’s failure to lower interest rates. After several successive interest rate cuts, the central bank’s monetary policies already seemed expansionary, and though commercial banks did appear to have money in their books, this money was locked in the safes of the central bank.

That is to say, the real monetary stock is still held by the central bank, not by commercial banks, let alone by shadow banks that are in essence distributors of the former. Therefore, Premier Li Keqiang was right about activating monetary stock. To achieve that, the country has to start with the central bank.

Only when monetary policies are brought back on track will growth return to the Chinese economy. The process will certainly require government guidance, but that’s no cause for fear. There is and always will be interaction between the government and the market, and it is most often complementary. Government intervention has its due place in a market economy, and the exclusion of the government is tantamount to the exclusion of market opportunities. The more services are provided by the government, the bigger the market becomes — that is the natural law of the market economy.

The writer Gao Liankui is the director of the World Economy Project at the Chongyang Institute for Financial Studies at Renmin University of China.

This article was published in Chinese and translated by Guo Jing.

Opinion articles reflect the views of their authors.