Analysts now allege that the Chinese central bank?s recently stipulated hike in the cash reserves of commercial banks addresses just one part of the economy?s overall ?overheating? problem. But we think that they are doing just fine. The half-a-percentage point raise in the banking reserve ratio, to 13.5%, will throw a lasso around the yuan in circulation, no doubt. But it does not need an understanding of either livestock farming or rocket science to infer that Chinese monetary policymakers want to squeeze liquidity in order to lower overall price levels and protect the poor from the travails of unaffordable food. Rampaging food prices are culpable in posting the latest headline number on inflation?18.2%?with fresh vegetables up by 22.5%, eggs 23.6%, cooking oil 34.6% and pork/poultry 49% (a story in itself). The remaining prices, mostly state-controlled, have been contained at or well below 5%. But even non-agricultural sectors will have to ride the downward spiral occasioned by the latest reserve hike, and the chief to be hit will be real estate, construction, steel mills and even car plants. These have attracted much speculative investment, and the central bank is clearly willing to risk numerous bankruptcies triggered by its tightening moves. Not only will that be a fitting denouement to speculative investment (mis)allocations in China?s market-oriented economy, it will also cool down recently aired demands for higher wages to maintain parity with inflation. That will again free the economy to focus on productivity, to which policymakers remain dedicated.
At this stage, one can do no better than to echo what Mr Bi Jingquan (vice chairman, National Development and Reform Commission, NDRC) said on September 4, last: ?Whether an economy is overheating or not should be judged by whether overall supply and demand is in balance and should not just be linked with the growth rate of the economy.? Besides, can there any complacence about competitiveness in an economy that has just overtaken Japan as the one with the largest foreign exchange reserves? Those are additional reasons for the central bank to have chosen the reserves-hike route over anything accommodative. It springs from the need to dampen inflation, and with it, the real effective exchange rate. Only that will continue to allow China?an import intensive, and capital exporting economy?to capitalise on its actual competitive strengths. It was a move well thought through.
