Riding the Tiger

Appropos of my recent blog earlier this week on the causes of China’s inflation, it has just been reported that March saw a surge in internal (yuan) currency loans by Chinese banks of 1.01 trillion yuan (equal to $160.1 billion)  far above the 710.7 billion yuan lent in February.  More significantly, this was the biggest deviation of actual from forecast loans in more than a year.  New yuan lending clocked in at 21 percent above the median estimate of 797.5 billion yuan calculated from a Bloomberg survey of 28 economists.  This is no accident since the Chinese government began loosening restrictions on lending capacity for three of its four biggest banks last month in an effort to preempt the  fall of the economy’s growth rate in the last quarter, which is expected to be announced today  as  8.4 percent, the lowest in  eleven quarters.   The government has also committed to cutting the reserve/deposit ratio of lenders by an additional 50 basis points this month, further loosening its monetary policy that caused a 13.4 percent year-over-year growth in the money supply in March.  This latest news makes it likely that the People’s Bank of China will exceed its broad money growth target of 14 percent for this year.

It has now become clear that the Chinese government has made its choice to avoid a “hard landing” by attempting to ride the unloosed inflationary tiger for as long as it can.   But its  strategy of massviely expanding fictitious  bank credit unbacked by real savings will cause added  distortions and exacerbate unsustainable imbalances in China’s real economy.  As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process and will precipitate  a “crash landing” that may well shatter China’s burgeoning market economy.  This would be a tragedy of the first order for the entire global economy.

Comments

  1. Traditional Chinese culture is one of thriftiness and saving.

    These are habits which even the terrors inflicted by the current dynasty have not erased.

    There are of course constant calls upon those savings, say to help a member of the extended family through university, or to buy their first home…

    Would any here like to offer opinions / speculations on whether the rulers choice of allowing monetary expansion and the resultant inflation is:

    A short sighted attempt to steal from the thrifty Chinese public (one which will bring a severe backlash when it is discovered)?

    A longer term attempt to increase the collective time preference of the population?

    an even more cynical attempt to precipitate a crisis which can be exploited by dynastic rulers to grab even more powers?

    Or even more cynical or short sighted ploys?

    • As a slightly OT corollary. I have not yet heard anyone in Ireland criticize the new tax on domestic property (supposedly to help pay for the national debt) as a claim of overlordship by the government, over the citizen’s property rights to their homes.

      Government allows crony banks to overtrade, subsequent collapse of the bubble then allows the government to bail out its cronies, the crisis of the debts incurred then allow the government to stealthily claim a stake in the ownership of all domestic properties.

      Thieving scum

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