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China Economic Insight Series (27) : Signs of tightening in the loose environment
2010-02-18DONG,Ai-Ying
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요약
Signs of tightening in the loose environment
At the recent central economic planning meeting, the Chinese government announced that it will maintain an aggressive fiscal policy and loose monetary policy in 2010. However, if the focus remains on economic stimulus rather than exit strategies next year, asset bubbles may be expanded and the intent of the Chinese government may become unclear.
Excess liquidity may be measured by the gap between M2 growth and
Due to the severe excess of liquidity, asset values in China have been surging and expectations of inflation are growing. In addition, mid-term risk in the financial sector is rising as bank loans flow into the stock market and real estate market. In addition, the excess liquidity is driving speculative activity in unproductive areas, such as rising prices for garlic, which has recently been touted as offering protection from swine flu.
Although the government is maintaining its accomodative stance, it has recognized the recent problems and is already signalling that it may tighten its policies. The government has been reining in market liquidity through open market operations and window guidance, restraining bank lending through capital requirements, and blocking hot money inflows through strengthened foreign capital inflow restrictions.
In 2010, the Chinese government will inevitably depart from its crisis response policies and begin implementing exit strategies step by step. In addition to the current open market operations and window guidance, exit strategies will include decreasing fiscal stimulus policies, higher reserve ratios, and appreciation of the renminbi. Interest rate hikes, however, will be the last measure used by the government.
At the recent central economic planning meeting, the Chinese government announced that it will maintain an aggressive fiscal policy and loose monetary policy in 2010. However, if the focus remains on economic stimulus rather than exit strategies next year, asset bubbles may be expanded and the intent of the Chinese government may become unclear.
Excess liquidity may be measured by the gap between M2 growth and
Due to the severe excess of liquidity, asset values in China have been surging and expectations of inflation are growing. In addition, mid-term risk in the financial sector is rising as bank loans flow into the stock market and real estate market. In addition, the excess liquidity is driving speculative activity in unproductive areas, such as rising prices for garlic, which has recently been touted as offering protection from swine flu.
Although the government is maintaining its accomodative stance, it has recognized the recent problems and is already signalling that it may tighten its policies. The government has been reining in market liquidity through open market operations and window guidance, restraining bank lending through capital requirements, and blocking hot money inflows through strengthened foreign capital inflow restrictions.
In 2010, the Chinese government will inevitably depart from its crisis response policies and begin implementing exit strategies step by step. In addition to the current open market operations and window guidance, exit strategies will include decreasing fiscal stimulus policies, higher reserve ratios, and appreciation of the renminbi. Interest rate hikes, however, will be the last measure used by the government.
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