China Tries To Make Its Economy Normal, Raise Banks Reserve Requirements By 50 Basis Points

China wants its economy to be like the ones in many other large nations. It wants slow GDP growth and tiny inflation–just like the United States.

To get on that path, China has raised bank reserve requirements–again. They will move higher by 50 basis points, and will be the second action in two weeks.

China would clearly like to keep its 10% per annum GDP growth and leave inflation, which recently hit a two year high, behind. The central government complains that “hot money” from the US QE2 program will drive bubbles in China and other fast growing nations. China created enough of its own hot money through liberal bank policies and its large $585 billion stimulus package. The improvement in its PMI numbers and exports show that the efforts worked. Now the by-products have become hell.

One of the policies of the Chinese government is the desire to see wages for factory workers rise very sharply each year to improve consumer spending inside the country.

“We expect the forthcoming wage increase to be around 20% in most provinces and cities,” said Jun Ma, chief economist of the greater China region at Deutsche Bank in Hong Kong, according to ICIS. It is simple to see why China has become more aggressive in its control of bank loans. It has already created a launch pad for hyper-inflation through its wage policies.

China can ratchet up wages because it has the trade partners to finance the increases. Whether that will cause  trade and currency wars, it is too early to tell. But, the game is becoming harder for China to win. It wants a large middle class to buy its goods and services so it does not have to rely so much on its trade partners. In the meantime, its manipulation of the yuan is a means for its exporters to finance their growth and profits.

China may get its way. The US and others may buy less from China because of its cheap currency. Then China’s consumers will be all the People’s Republic’s economy has to fall back on.

Douglas A. McIntyre