The People’s Bank of China said it will raise the reserve ratios that banks in the country must keep to .5%. It is the second time that it has increased the ratio in a year.
The action is viewed by most economists as a way to head off a sharp increase in inflation caused by lax loan practices and the nation’s $585 billion stimulus program. China has posted increases in food and commodities prices. The expansion of its manufacturing sector has also accelerated sharply. The value of equities and real estate have shot up over the last two quarters.
The unintended consequence of the action is that it may starve businesses in China which need money for expansion. Analysts suspect that the rapid improvement in China’s GDP is not simply a by-product of demand for its exports. Consumer demand within China, an important part of its growth, has probably been fueled by easy access to capital and credit.
But China’s manufacturing growth may have already overheated. That means the nation may be building and exporting more goods than demand overseas would warrant. That would tend to cause a build up in inventory among China’s trade partners like the US. That build up will only last a quarter or two if GDP growth in the West slows. Inventory contraction among developed nations would kill the improvement in China’s exports quickly.
improvements in the pace of manufacturing also mean that China may have to sell its goods at below market prices to create demand. That is the stuff of which trade wars are made.
Douglas A. McIntyre