Tuesday, March 22, 2011

China, Monetary Policy, and the U.S.

The U.S., still the monetary linchpin of the global economy, is fighting its unemployment with monetary and fiscal stimulus rather than addressing the dislocations created by the housing bubble.   This repeat of its policy mistakes in the wake of the high tech bubble is destabilizing the world economy.  The emerging world has led global economic growth over the past decade with China, Brazil, and India the main powerhouses.   Super loose monetary policy in Europe, Britain, and especially the U.S. has flooded them with foreign exchange reserves which have threatened to over inflate their economies.

The People's Bank of China's Governor, Zhou Xiaochuan (on the left in Bloomberg photographer Tomohiro Ohsumi's picture) sees fighting asset bubbles as well as inflation in his job description.   The central bank has raised its reserve requirements for the third time this year, according to the Aaron Back and Tom Orlik in the Wall Street Journal: "China's central bank said Friday it will raise the share of deposits banks must hold in reserve by half a percentage point, the third increase this year, as inflationary pressures remain in the spotlight."  At the time of the Bank's November reserve requirement increase, Bloomberg News reported, "China ordered banks to set aside larger reserves for the second time in two weeks, draining cash from the financial system to limit inflation and asset-bubble risks in the world’s fastest-growing major economy."  This enforced increase in banks' liquidity restricts their ability to expand loans.

Nor is this the only monetary policy tool being used.  The central bank raised interest rates in February.   Indeed, "[t]he PBOC raised the reserve requirement ratio six times last year, and benchmark lending and deposit rates three times since October. The previous reserve ratio increase took effect Feb. 24."  In November, Qu Hongbin, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong, told Bloomberg  the bank “decided to fight forcefully” against the impact of America's loose monetary policy.

Gordon Chang, author of "The Coming Collapse of China," talks about China's economy and currency policy. Chang, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses Federal Reserve Chairman Ben S. Bernanke's November speech in Frankfurt.

Below Keith McCullough, chief executive officer of Hedgeye Risk Management and a Bloomberg Television contributing editor, to Bernanke's defense of quantitative easing (see above.) What does this mean for for U.S.-China relations? McCullough speaks with Betty Liu on Bloomberg Television's "In the Loop."


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