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Monday, June 13, 2011

Growth vs. Inflation – The Present Chinese Conundrum

Biggest problem which China is facing these days is growth-inflation equilibrium.Chinese monetary authorities have been tightening the economy by hiking interest rates and raising RRR (Reserve Requirement Ratio), another name for Cash Reserve Ratio (CRR) prevalent in India.

Chinese government seems to be succeeded to some extent in their efforts to hinder rising credit growth in the economy; loans were down by 25% in May in comparison with the previous month.
Credit curb was being done to combat with soaring inflation and real estate appreciation which was turning into a bubble.
Over $ 2.7 trillion of loans were disbursed in China over two years which pushed property prices to all-time-high.
If developed real estate does not get sold in stipulated time, it shall be followed by credit defaults from developers.Even now, china has well developed cities devoid of business establishments and customers while on the other side there are people who want to buy property but can’t afford it.There is evidently widened gap between ‘haves and have not’s.

If China continues monetary tightening and hinders the money supply, its economy shall be badly hit.
And what shall make this situation worse shall be slowing US economy, which shall emphasize on cutting imports from china to cut its trade deficit, and the point to note is US is the leading importer of Chinese products.

China’s export has decreased in the month of May. Debt restructuring plight in Europe and stagnation looming in Japan too shall have negative impact on Chinese economy.
China has got huge cash-surpluses which are kept in US treasury products and the same can’t be used domestically to support economy as it shall further lead to inflation.

China being the export oriented economy is highly dependent on well being of USA, Europe and Japan and any grim economic situation there shall be detrimental for the growth of Chinese economy, which is presently growing at 9.7% (FY 12 Q1 Data).


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