Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

China Monetary Policy: Inflation Won't Last – Growth Will

Economics / China Economy Jan 21, 2011 - 05:57 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleJason Simpkins writes: Investors yesterday (Thursday) were rattled by fears that China's economy is overheating after it was revealed that the country's gross domestic product (GDP) expanded by 10.3% in 2010.

However, the policy changes that will come as a result of the data ultimately will benefit both China and the United States.


No doubt, inflation will remain problematic for China in the short-term, but policymakers are poised to respond with tighter lending controls and an appreciation of the nation's currency, the yuan. That will help tame a politically sensitive trade surplus with the United States and ensure more stable growth for the world's second-largest economy.

The Dow Jones Industrial Average fell 0.02% yesterday to close at 11,823.25 after earlier falling as low as 11,745.98. The Standard and Poor's 500 Index ended the day 0.13% lower at 1,280.26 after dipping to 1,271.27 in morning trading.

Oil prices, which have hovered around $90 a barrel for months also declined on the news, tumbling $2, or 2.2%, at $88.86 a barrel on the New York Mercantile Exchange (NYMEX).

Still, analysts don't see any reason to panic.

"Concern about China is actually a good excuse to sell after a sharp run in stocks and commodities," Dan Veru, chief investment officer at Palisade Capital Management LLC told Bloomberg. "Does that change the fundamental outlook for the long term? I don't think so. In the U.S., the earnings picture is pretty impressive. Economic data points have been surprisingly positive. I just see a temporary pullback."

Naturally, the tone is slightly different in China where policymakers are scrambling to rein in rapidly rising prices.

Consumer prices in China last month were up 4.8% from a year earlier. That's down from an 18-year high of 5.1% in November but still well above the official target of 3%. Food prices rose 7.2% last year.

With analysts expecting inflation to remain at current levels, and even trend higher, the People's Bank of China (PBOC) will be forced to redouble its efforts to control prices.

The PBOC on Christmas Day raised interest rates by 0.25%, bringing its key one-year lending rate to 5.81%. The reserve requirement ratio for state-controlled banks has been raised seven times since early 2010. The most recent increase of 0.5% went into effect yesterday (Thursday), bringing the reserve requirement to a record high 19.5%.

However, these measures so far have not had the desired effect. Banks continue to lend excessively. The government in 2010 failed to hold lending below the targeted maximum of 7.5 trillion yuan ($1.14 trillion), and Chinese banks extended more than 1 trillion yuan ($152 billion) of new loans through Jan. 19, the 21st Century Business Herald reported, citing an industry source.

China Development Bank Corp. ordered its branches on Jan. 18 to halt lending for the remainder of the month, due to government notice the newspaper said.

Nomura Holdings believes the PBOC will raise its benchmark lending rate to 6.81% this year from 5.81% currently. The next rate increase could come in less than month, perhaps during the Lunar New Year, which begins Feb. 3. Nomura believes China will let the yuan rise as much as 6% against the dollar this year.

The yuan gained 3.6% in 2010 and rose to a 17-year high of 6.5824 per dollar on Wednesday.

Brian Jackson, an economist with the Royal Bank of Canada in Hong Kong, said he expects the yuan to strengthen to 6.20 against the dollar by the end of the year. That would be a change of roughly 6% from where the currency traded yesterday.

A rising yuan would make it cheaper for Chinese companies to import raw materials, helping to reduce prices. It would also placate U.S. policymakers who continue to assert China's currency is kept artificially low.

U.S. Sen. Charles Schumer, D-NY, on Wednesday said that the currency is undervalued by as much as 40%. President Barack Obama and other U.S. policymakers addressed the supposed discrepancy directly with Chinese President Hu Jintao during a rare visit yesterday.

"There needs to be further adjustment in the exchange rate," Obama said bluntly.

However, Chinese policymakers have pointed out that the United States has done little to backstop the value of the dollar. The U.S. Federal Reserve's benchmark Federal Funds rate currently stands at a record low range of 0-0.25%, and last year the Fed announced another $600 billion in Treasury purchases.

"We hope the yuan will get stronger but don't want the appreciation pace to be too fast," Ma Weihua, chief executive officer of China Merchants Bank, told Bloomberg. "The U.S. isn't taking responsibility. It called on China to adjust its yuan policy, but the whole world is suffering from its easing measures."

Since many commodities are priced in dollars, a weaker greenback has meant higher prices for the entire planet. Additionally, China holds $2.85 trillion in foreign currency reserves, mostly in dollar denominated assets.

Of course, a large portion of China's holdings derives from its trade imbalance with the United States. China reported a less-than-forecast $13.1 billion trade surplus for December, the smallest since April.

Even with the monetary tightening, the World Bank estimates that China's economy will expand by 8.7% this year.

"Coming from this very strong growth that we have seen recently, China should be able to ease gently into a more sustainable rate of growth in 2011 and the medium term," said Louis Kuijis, senior economist and the main author of the World Bank's China Quarterly Update.

Source : http://moneymorning.com/2011/01/21/china-monetary-policy-inflation-wont-last-growth-will/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Satish Chandra
22 Jan 11, 18:49
Economy

I can reasonably claim to be the world's foremost behavioral scientist -- a science of behavior is the foundation science of all social sciences including Economics -- and in my proposal about money -- the greatest development in social science, greater than Marx or Freud and, arguably, the greatest development in human history -- described in my article 'How India's Economy Can Grow 30% Per Year Or More' which can be found by a Yahoo/Google search with the title, I pointed out (as I have described there, the Nobel Prize in Economics was given by the firangis to the mediocre Indian Amartya Sen as a substitute for me) that "Indian Railways need not collect any fares from passengers (or freight charges) at all since the government can print all the money it needs to pay for the service, at a negligible cost (the cost of printing the money) and, in the process, greatly benefit the economy. In fact, as I have said (letter published in three parts in The Observer of Business and Politics, New Delhi, on March 11, 12 & 13, 1997), the government need not take in any money at all-- in the form of taxes, charges or borrowings-- when it can print all the money it wants. The more money the government prints and spends for goods and services, the more the economy will benefit (printing paper currency can be replaced with, say, electronic insertion of funds into accounts for certain purposes). This applies to all goods and services and all governments." For a fuller treatment including issues such as deficits, inflation, etc., see my article. Satish Chandra


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules