Riding China's inflationary tiger
The Chinese government has made its choice to avoid a 鈥渉ard landing鈥� by attempting to ride the unloosed inflationary tiger for as long as it can. But its strategy will exacerbate unsustainable imbalances in China鈥檚 real economy.
Folk artists perform a fire dragon dance during a Spring Festival Temple Fair celebrating the Chinese Lunar New Year in Beijing in this file photo. Salerno warns that the Chinese government's monetary policies may exacerbate unsustainable imbalances in their economy.
Jason Lee/Reuters/File
Appropos of my recent blog earlier this week on the causes of China鈥檚 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)聽 far above the 710.7 billion yuan lent in February.聽聽More significantly, this was the biggest deviation of actual from forecast loans in more than a year.聽 New yuan lending clocked in at 21 percent above the median estimate of 797.5 billion yuan聽calculated from a聽Bloomberg survey of 28 economists.聽聽This is no accident since the Chinese government began loosening restrictions on lending capacity聽for three of its four biggest banks last month in an effort to聽preempt the 聽fall of聽the economy鈥檚 growth rate in the last quarter, which is expected to be announced today聽 as 聽8.4 percent, the lowest in聽 eleven quarters.聽 聽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聽that caused a 13.4 percent year-over-year growth in the money supply in March.聽 This latest news makes it likely that the People鈥檚 Bank of China will exceed its聽broad money growth target of 14 percent for this year.
It聽has now聽become clear that the Chinese government has made its choice to avoid a 鈥渉ard landing鈥� by attempting to ride the unloosed inflationary tiger for as long as it can. 聽But聽its 聽strategy of massively expanding fictitious 聽bank credit unbacked by real savings will cause added 聽distortions and exacerbate聽unsustainable imbalances in聽China鈥檚 real economy.聽 As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process聽and will聽precipitate 聽a 鈥渃rash landing鈥� that may well shatter China鈥檚 burgeoning market economy.聽 This would be a tragedy of the first order for the entire global economy.