Saturday 19 February 2011

CHINA’S MONETARY POLICY

International Business Times

CHINA SYNDROME

Mark Luschini

International Business Times, February 19, 2011

The central bank of China raised interest rates again last week and followed that by increasing the reserve requirement for the country's banks this week.  This has been a fairly consistent pattern by the People's Bank of China over the last four months.  The signs of creeping inflation and speculative activity in the property markets are clearly higher than the authorities' comfort level.  Consequently, monetary policy is in the midst of "catching up" to economic activity.

The one year lending rate in China today stands at 6%, which is well below that of nominal GDP growth.  That has elevated concerns that the tendency to have kept rates too low for too long, has caused overheating conditions that may be difficult to reign in though simple policy tools.  A central theme in China's recently released five-year plan is to expand domestic consumption.  Keeping interest rates low is a means by which to facilitate that goal.  However, it may also lead to asset inflation and possible market distortions that render the low interest rate policy counterproductive. 

The risk of China tightening monetary conditions, which is true for any country whose central bank is using conventional policies to manage growth and interest rates, is that it works with a lag.  Therefore, it will not be known for months if enough or even too much has been done to stem business activity and inflationary pressures.  Should policy be applied heavy handedly, it could thwart economic activity enough to scare Chinese officials into a possible stop-go blunder.

(…) [artículo aquí]

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