The central bank of China has raised RMB reserve requirement ratio (RRR) by 50bps third time in last 5 weeks time and 6th times in 2010 without touching its key 1 year lending rates. The goal of course is to try to slow lending and quell inflation. This has become a huge test and challenge for the Chinese government and even bigger if we consider the Nov CPI figure which is posted at a sizzling 5.1%. On Saturday China has reported that their Nov 2010 inflation (CPI) figures reached on 28 months high (y/y). This might be a possibility that this is a number that Chinese govt. is accepting and the real number most likely is much higher than exposed. If the Chinese fail to act aggressively we could see a sharp spiral in inflation.
It is not clear that the Chinese have the political will or the financial necessity to stop this inflationary tsunami. It seems like they are not very sure about their growth and this fear is resulting in the failure to allow their currency to float which is causing economical imbalances. Another reason can be considered is under developed financial instrument in the market which is making Chinese govt’s way difficult to react on inflationary problems. Over the years, the central bank has bought most foreign currencies flowing into the country to keep China's currency yuan stable and thus injected a huge amount of yuan cash into the system, which needs to be sterilized. Heavy foreign exchange flows in recent years have left commercial banks holding too much yuan, forcing the PBOC to use bill sales and bank reserve requirement ratios to sterilize it, Wu was quoted as saying. It sounds bad but seems to be true that “if China doesn’t stop inflation then inflation may stop china.”
No comments:
Post a Comment