Saturday, 9 April 2011

awareness educational China monetary policy

Viruses from mid east

Risk of a bubble just beginning in China

Beijing . China's latest interest rate increase puts it near the end of a sustained campaign of monetary tightening, a shift in policy stance that will support economic growth this year but lay the groundwork for asset bubbles down the road. 

The steady drip-drip of actions to tame inflation since October has succeeded in reining in money growth and slowing the upward momentum of price pressures.

Base effect dictates that consumer price inflation should fade quickly in the second half after reaching a forecast 32-month high of 5.2 percent in the year to March and possibly as high as 6 percent in June.

That will give officials the confidence to slowly take their feet off the monetary brakes, especially given their worries about the economic impact of Japan's disaster and Europe's debt crisis.

"Generally speaking, the inflation rate is stabilising. And that, together with some signs of growth moderation, means that they don't need to tighten so much anymore," said Ken Peng , an economist with Citigroup in Beijing.

So runaway price increases are not on the cards. The far bigger worry is that with inflation stabilising, officials will feel little urgency to raise interest rates much higher -- and that low real rates for an extended period will greatly increase the risks of over-investment and a property bubble in China.

To be sure, no one is forecasting a relaxation of monetary policy, just a gradual phasing out of tightening moves.

Economists polled by Reuters expect only one more interest rate increase this year after four in the past six months and they see three more reserve requirement increases after six since November.

The central bank may also slightly loosen its grip on lending by commercial banks, a crude control measure that is China's most important monetary policy tool.

"Our view is that the central bank may have a brief period of policy pause, amidst the growth slowdown and better-behaving lending activities," Dong Tao, an economist with Credit Suisse, said in a note.

"The pause is unlikely to be publicly announced, in our view, but the authorities may have more tolerance towards lending activities," he added.


While a short-term pause or, at least, slowdown of tightening might be prudent and keep the economy on track for 9 percent growth this year, the implications of a longer pause would be more troubling.

The problem is that, once the dust has settled, the new normal for Chinese inflation will be higher than in the past, averaging about 4 percent because of structural forces in the form of steadily rising wages and food demand.

As a result, deposit rates, which now stand at 3.25 percent at the benchmark one-year tenor, will probably stay very low or negative in real terms for quite some time. 

Ding said -“ this could spark a  fire!!! Suicide by CCCP ? Look that political turbulent & raising anti communist by the poor citizen of PR of China!! The viruses from mid east are spreading in to China?????” 

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