Tuesday, October 19, 2010
China and Inflation
Bloomberg has a nice elementary macroeconomic analysis of Chinese inflation.
Where did all that money come from? It came from Chinese banks being allowed to draw down on their reserves, which opened up a cascade of new lendable funds throughout the entire system. China’s lending boom was, in effect, a massive monetary stimulus, or “quantitative easing.”
The pressure behind this monetary eruption had been building for some time. For years, China has been running big trade surpluses. To maintain the yuan’s peg to the dollar, its central bank must buy up the excess dollars earned by Chinese exporters, to be stockpiled as foreign-exchange reserves, and issue yuan in exchange. Normally, that newly issued yuan would add to China’s domestic money supply and fuel inflation.To prevent that, authorities try to “sterilize” the monetary expansion by forcing banks to hold higher levels of reserve deposits and buy special central-bank bonds. In short, there was a huge reservoir of liquidity bottled up in China’s banks, just waiting to be let out. The low loan-to-deposit ratio of Chinese banks, often touted as evidence of their financial solidity, is really a product of pent-up inflation.
# posted by Wiggins @ 6:16 PM 
