Wednesday, January 05, 2005

China Targets Lower Money Supply Growth

The only way for China to cut money supply growth, in my opinion, is to stop accumulating foreign reserves at such a dramatic pace. Sterilization doesn’t work, I think, because when the central bank tries to mop up liquidity it does so by exchanging a short-term asset for a long-term asset, but the longer term asset can easily be monetized by the financial institution in question. This whole question may be moot anyway, given China’s government-driven credit rationing system. That said, rationing credit clearly isn’t working either, given that the bank credit targets are routinely violated.

The implication of less foreign exchange intervention is, of course, a weaker dollar. There is a clear dilemma here. If you want to stop money growth, you have to stop intervention. If you want to stop intervention, the exchange rate will appreciate. So you can’t control the money supply and the exchange rate at the same time. This is a well-known idea in economics that many smart people don’t really believe...

China Cuts Money Supply Goal to 15% to Curb Inflation (Update8)

Jan. 5 (Bloomberg) -- China's central bank cut its target for growth in the amount of money circulating in the world's fastest-growing major economy and signaled it may raise borrowing costs to curb inflation.

``The central bank should fully take advantage of the function of interest rates in adjusting the economy,'' Governor Zhou Xiaochuan told a bank meeting yesterday in Nanning, Guangxi province, according to a statement.

The People's Bank of China plans to cap growth in M2, the nation's broadest measure of money supply, at 15 percent this year, compared with a 17 percent target for 2004 and actual growth last year of about 14.5 percent, Zhou said.


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