In a surprise move China’s financial authorities decided last week to abandon their tight money lending policy and losend the reigns for its banks again. Wrong policy, says business analyst Shaun Rein in CNBC, who has been praising the government handling of inflation and overspending in the past.
The net result [of past policies] is that China has so far staved off the worst of the world’s economic ills. Retail sales have grown 16-18 percent annually. The stock market almost doubled from its lows, and GDP has grown around 9 percent annually.
China’s good times, however, might end after a major policy mistake by the central bank last week that could spur rampant inflation and trigger a speculative and very dangerous bubble in the real estate sector. The central bank dropped the reserve ratio requirement for banks by 50 basis points,signaling an end to the tight monetary policies needed to stave off inflation…
By loosening the monetary policy so early, China’s central bank also sent the signal to local officials that real estate would continue to be a major revenue stream – both by land sales and tax revenue. This is unhealthy as far too many local governments generate the majority of tax revenue from the real estate sector. This reliance on easy tax revenue has stopped them from promoting actively enough small and medium enterprises, which should be the backbone of job creation.
The central bank should have kept a tight monetary policy not just to stave off inflation but also to send a clear message to real estate developers, speculators, and local officials that the real estate sector cannot play such an outsized role in the economy.
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