worsening of problems in europe. but at the same time, the programs implemented in 2008 – 2009 have lost their efficacy, and the authorities are taking a more cautionary stance. today, china needs to rearrange its economy, and although events in europe have caught china flatfooted with respect to its economic reforms, part of the adjustment to slower shortterm growth is necessary and partly inevitable. a significant impulse to public expenditure and investment will only be observed if there is a significant deterioration of external conditions. overall, the chinese economy faces important challenges in the short run. these could introduce fluctuations in commodity prices that threaten to expose the weaknesses of countries in the region whose recent growth has come almost exclusively from increased expenditure financed by the chinese boom. in particular, it is especially important at this point that the region work hard to maintain the health of its fiscal and external accounts. thank you. bis central bankers ’ speeches

##meo, university of toronto, central bank of chile and pontificia universidad catolica de chile. melitz, m., and d. trefler ( 2012 ), “ gains from trade when firms matter ”, journal of economic perspectives 26 ( 2 ). bis central bankers ’ speeches challenges facing china i would like to end by referring to china ’ s challenges in the short run, and the impact that current developments may have on the economies of the region. already in the mid - 2000s the chinese economy was in a transition to becoming less dependent on the external sector and investment demand, and thus trying to promote domestic consumption. there were obvious signs of investment exhaustion in some sectors, together with doubts about the capacity to sustain such high rates of export growth. the reforms adopted in the middle of the past decade to enhance the operation of the financial system and thus attain a more efficient allocation of credit – to offset the natural fall in the savings rate – came to a halt during the crisis of 2008 – 2009 due to the great boost in government expenditure and public credit. this boost, which allowed the chinese economy to deal quite successfully with the global financial crisis, brought about significant indebtedness of local governments, high exposure of the financial system to projects of dubious quality, and substantial over - investment. the need to put a stop to this impulse in order to safeguard macroeconomic stability has defined china ’ s economic policy decisions since 2010. accordingly, the contractions in investment projects and credit availability have been the main stabilization tools used in china. however, this process coincided with the aggravation of problems in europe, which resulted in a very sharp reduction of external demand for the chinese economy, among other things. the fall in exports, together with the need to withdraw the stimulus that had been given to investment over the past few years, has put significant pressure on china ’ s growth. its capacity to offset the drop in demand with increased domestic consumption is limited in the short run, especially since the necessary conditions to promote lower savings rates, such as changes to social security and health - care plans, a deepening of the household credit market, and changes in relative prices – such as a real exchange rate appreciation –, are often slow to implement. until now the chinese economy has continued to decelerate, and somewhat more rapidly than was foreseen a few quarters ago. in my view, china has the necessary tools to deal with this deceleration, and to deal with a possible