Monday, January 08, 2007

China May Further Reduce Liquidity In Economy

Another interesting article today on Bloomberg regarding China's lack of ability to control their economy. Or, at least, that is my interpretation. I find it the following comments from the Chinese central banking governor rather interesting:

"Various measures taken by the central bank since 2006 have achieved some results in slowing down lending growth in the past few months,'' the People's Bank said, announcing the increase in bank reserve requirements on Jan. 5. "However, there is a new increase of excessive liquidity in the banking system ......... and there is rising pressure for loans to increase.''

"too much attention has been paid to targeting money supply, when the final targets are inflation and stability", Zhou said in Basel.

That's an interesting statement which shows a fair amount of naivety in my estimation. Now, I'm not here to say I'm more qualified to run the central banking operations in China but what I am quite confident of is 20% per annum money supply growth over a period of longer than half a decade should be grounds for concern at the minimum. There was little inflation and instability in the U.S. up until 1929 either. Nor leading up to 2000. Money supply growth is generally positive in a healthy economy but excess money supply growth can lead to trends and investments which aren't sustainable. Especially when they are guided by a corrupt central planning body. There are many economists who would argue his position but there are many who would point to my concerns as well. Which side is right? The future will tell. Along the lines of my final comment, Frank from In The Green points to a damning article on the Chinese economy over at the Guardian which is a very worthwhile read as well.

posted by TimingLogic at 5:08 PM