China adjusts its monetary policy

China adjusts its monetary policy
Dec 7, 2007 00:43
ZOEY Points: Join Date: Nov 29, 2004 Status: offline	It is reported that China has announed to adjust its monetary policy from 'prudent' to 'tightening'. The central government made this decision at the annual economic conference in Beijing this week. What doest this mean? Faced with inflation risk and soaring prices of food and other products, China needs to take more cautious measures. Next year, China will continue to curb new bank lendings, controlling the growth rate of new lending around 13 percent, lower than the average growth rate 15% in recent years. How do you view this move? Does this mean that China really face inflation risk and its economy is over-heated and growing too fast?

Dec 7, 2007 00:43

ZOEY
Points:
Join Date: Nov 29, 2004
Status: offline

It is reported that China has announed to adjust its monetary policy from 'prudent' to 'tightening'. The central government made this decision at the annual economic conference in Beijing this week.

What doest this mean? Faced with inflation risk and soaring prices of food and other products, China needs to take more cautious measures. Next year, China will continue to curb new bank lendings, controlling the growth rate of new lending around 13 percent, lower than the average growth rate 15% in recent years.

How do you view this move? Does this mean that China really face inflation risk and its economy is over-heated and growing too fast?

Dec 8, 2007 08:28

APAULT
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Join Date: Mar 11, 2006
Status: Offline

Certainly the Chinese economy is overheated. How can it be that it is growing TOO fast?

Unfortunately there is a limit on how fast an economy can grow over an extended period. Every new factory, every new school or whatever, needs skilled and experienced staff. This is simply not available. Buildings and factories need materials but they cannot be supplied. In the short term China has hired foreigners, but that is expensive and is only part of the solution. China needs iron and coal from overseas, but not only have market forces pushed up the prices, but Australia (for one) is unable to upgrade its infrastructure fast enough to ship out the raw materials - ships are waiting offshore unable to load.

Overall there is competition for limited resources so prices rise. Rising prices have many repercussions. At the simplest level workers wages are reduced in real terms. If we raise their wages the cycle of inflation continues, if we don't the workers become restless... and we don't want that.

So, yes, the government must tighten things for a while, give market forces a chance to settle down across sectors, internationally. Done early there should be minimal suffering, left too long and we see sudden changes that cause unemployment and much reduced profits.

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