China’s decision to raise the bank deposit reserve ratio indicates that the country is facing a serious threat of inflation, but will not hike interest rates, a local academic said yesterday.
Instead it is tightening the supply of currency moderately in the hopes of achieving a soft landing for its economy, National Taiwan University professor Chen Tian-jy (陳添枝) said.
Chen was commenting on an announcement by China that it will raise the reserve requirement for banking institutions by 0.5 percentage points, effective on Thursday — the seventh time it has done so since early last year.
Chen said the greatest risk for China is a collapse of its housing market.
China is tightening its supply of currency rather than jacking up interest rates because the latter “would increase the pressure on the Chinese yuan to appreciate while attracting more hot money into the country,” Chen said.
Chen, a former head of the Council for Economic Planning and Development, said China is hoping to use a longer time span for its economy to achieve a soft landing as a less costly means of riding out its economic crisis.
Tightening the currency supply will also have a lesser impact on its stock market, as the major index of more than 2,000 is rather low and could absorb a tightening of cash, he added.
He said that if China’s housing market should go bust, provincial governments would immediately face financial crunches that include banking institutions’ bad loans from the housing market.
A banking crisis would create a major storm for the Chinese economy, Chen said, adding that this is why Beijing has been trying to release pressure from its “pressure cooker” gradually through a moderate tightening of its currency.
China’s economic stimulus package featuring loosened monetary policy in the wake of the 2008 global financial crisis and that was to blame for adding inflation pressure, Chen said.
At that time, China allowed its banks to expand lending to stimulate investment, a move that increased consumer prices, he added.
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