China's central bank has stepped in to curb lending in its banking system.
Chinese banks must now keep more money back in reserves, the first such increase since June 2008, thereby taking cash out of the economy.
Chinese Premier Wen Jiabao recently urged banks to curb lending, saying they needed to be "more balanced".
China is concerned about inflation and potential asset bubbles - in stocks and property - forming in its booming economy.
The People's Bank of China also raised the interest rate on its one-year Treasury bills, another move designed to remove money from the system.
The central bank has issued a series of calls recently to banks to moderate their lending.
Monetary policy
"It would be good if our bank lending was more balanced, better structured and not on such a large scale," Mr Wen said recently, according to the Xinhua news agency.
The new moves came a day after state media reported that the banks had extended 600bn yuan ($88bn, £54bn) in loans in the first week of January.
China had employed what it called a "moderately loose" monetary policy over the past year to keep the economy growing amid the global downturn.
Economic growth is not the worry for China that it is for many other parts of the world, particularly developed nations.
The country has announced it is targeting economic growth of 8% this year.
The People's Bank of China tightened the reserve requirement in case of the overheating economy caused by the 4 trillion RMB stimulus fund last year. This action decrease the money multiplier in the economy, which is a relatively effective way to slow down the unstable Chinese economy. The 4 trillion stimulus fund was mostly used on the infrastructure construction, and has brought a lot of positive effects onto China's GDP during the world economy downturn period, which keeps China's GDP growth rate still relatively high, created a lot of job opportunities, and made a lot of positive effects on the world economy during 2009. At the same time, the stimulus plan also floods China with cash. A lower interest rate resulting from that combined with the already cheap labor price, more international companies focus on Chinese opportunities. Food price increased; wages increased; etc. As a whole, these more and more cash has already given sign that the inflation is endangering the just released economy in China. Under the stimulus plan and the overheating confidence, there may be bubbles already waiting in the corner. From the report, we see that Chinese government is seeking for a stable and healthy economy growth. This monetary policy will be a start of the following policies, and hopefully, it could keep the GDP slow down instead of overheating.
ReplyDeleteThere is a lot of fear about how the Chinese economy is a giant bubble, just like the one we saw in Japan during the 80s. I think there are numerous arguments for and against this comparison, however, one of the largest differences is that China is still developing where Japan was developed. Government spending on infrastructure to boost the economy is far from wasteful; about 2/5 of the villages in China still don't even have paved roads. From an investment standpoint, the price to earnings ratio of the Shanghai A Shares is 28, far below Tokyo's peaks of 70. I think there is still a lot of real growth that China will see and the policies it is putting in place now will secure an even longer, slower and sustainable growth.
ReplyDeleteTo Adam:
ReplyDeleteIt is so easy to create an economy bubble. In 80s, when Japan's economy was growing better and better, a lot of transnational super companies wanna seiz the chance to win. More and more hot money flew into Japan's already hot economy. Once the bubble began to show, the whole economy collapsed and those super powers ran away with a lot of wealth cut from the sheep. It is really worrying about China. It is true that China is experiencing a fast economic growth when judged only by GDP growth as it is highly boasted by almost every media. But the truth is, it is still far behind many developed countries in the world if we take more measurements. As you said, even the highway is a problem in China. Being a Chinese, I would still want to point out that although even the GDP is enjoying a high growth rate in China, China's growth is not healthy, like the high cost, the high pollution, the high reliance on export, the imbalanced economic structure, etc. Even the unemployment rate in China is a big problem to the government. As you said, to fully develop China to some exlend like Japan and US, there is a long way to go. One thing I do not agree with you is the bubble. I feel that it is so easy to create bubble in China in this situation. Due to the unhealthy growth, people just wish the fast the better, and this is the trigger for a potential bubble. What's more, so many people, so big market, and so good chance to dig gold, those are the best aim the international giant is searching for. That is way the government is curving the overheating economy and hopefully it will help.
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ReplyDeleteTo Garteh and Adam:
ReplyDeleteChinese government's decision to decrease the reserve ratio and increase the interest rate on one year treasury bills would tighten the money suppy. The decision is a big question mark especially when the Chinese governement already dcelared that it is aiming at a GDP growth of 8% in 2010. Just when the developed economies started to recover the decision relfect's China's fear for another burst of bubble. For the past few years Chinese people enjoyed the econimic prosperity. This would probably give them the confidence to inflate the asset bubble as many people did in USA in the early 2000's. I think the monetary policy which will reduce the money supply will prevent that from happening. But these days not many developed economies change the money supply by adjusting the reserve ratio. For, example the last time USA changed the reserve ratio was in 1992.
If the positive GDP growth of China is the cause of concern then China's GDP growth is a bit overstated on papers. Obviously when computing the GDP growth what people don't take into account is the loss caused by pollution and China's pollution problem is a big reason to overstate the GDP.
Probably Chinese government want to ensure that the money spent on stimulus doesn't back fire in the form inflation, that is why they want to reduce the money supply. But the best part of the stimulus fund was that it ensured China didn't go onto a recession. The multiplier effect is strongest when it comes as the government spending.
To Adam:
ReplyDeleteI agree with your statements; China has a lot more government spending it can do on infrastructure, but my main question is when will this economic power start transferring into political power? The people will want more investment into the citizens themselves since they are the labor force. The world will start to look for China to take a bigger role in the world stage. I think that is an interesting question that awaits action by the Chinese government.
I think that the new monetary policy that China introduced is conservative. Their new approach I believe, could bring back sustainable growth since the Chinese has been thinking long term the past couple of years.
I would like to just point out the comparison between the U.S. stimulus plan and the Chinese stimulus plan. The areas for funding are very similar, but the media attention and citizen awareness is huge in the U.S. yet almost nonexistent in China.
ReplyDeleteMaybe the stimulus plan is being 'hushed' so that its help to the economy can be passed as a continuing maintenance/increase of the high 8% growth in GDP? - every honest analysis of the Chinese governments ability to hold on to power through so devastating political and economic catastrophe’s is attributed to the government’s ability to maintain economic growth and that 8% growth in GDP. What happens when they no longer can maintain growth? Especially with the growth in economic equality and calling for democratic reforms….