Dropping inflation, a bumper harvest, falling food prices and other good financial news does not mean China’s financial institutions should leave their policies of tight lending, writes financial analyst Victor Shih in the Financial Times. Even though many industries anticipate easier lending soon.
The sell side community is already priming for macroeconomic loosening in the form of reserve requirement ratio reduction or even a drop in interest rates.
To be sure, some liquidity would alleviate pressure in many quarters.
The entire Rmb1,000bn railroad construction industry faced mass bankruptcy until the central government ordered banks to lend Rmb200bn to bail-out the Ministry of Railroad and its contractors.
Wen Jiabao had to fly to Wenzhou to order banks to keep lending to small and medium enterprises. Some are hoping that the government will do the same for infrastructure and real estate through more general easing.
Yet, policymakers should think twice before easing too much. Inflation remains high, and food inflation for the year remains at over 12 per cent, which especially high pressure on low income households.
Aggressive general easing, such as a rapid lowering of RRR, would once again build up inflationary expectation in China and international expectation for high commodities prices. China could be back in a high inflation situation in a year’s time. Moreover, any aggressive easing now would render macroeconomic tightening incredible in the future.
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