Friday, February 12, 2010

China Raises Reserve Requirement

The Peoples Bank of China announced overnight that it has raised the reserve requirements for Chinese banks. Effective February 25, the reserve requirements for Chinese banks will increase by 50 basis points to 16 per cent for large commercial banks.

Chinese money growth has been dramatic. This move will not stop the money growth. However, these incremental moves by the PBOC will be enough to eventually slow the money growth and impact China's overheated economy.

At that point, China will become a leader in the second down leg of the Great Recession.


  1. Wenzel,

    Something I've puzzled over quite a bit: CBs routinely say they're raising rates to reign in an "overheated economy"... all they ever need to do to stop an economy from overheating is stop printing money. Seems phony. Why do they really raise rates? In other words, what spooks them into slowing down money supply growth all of a sudden, when weeks earlier it was a good thing?

  2. They think they can, like gvt officials around the globe, micromanage the whole thing.

  3. Wenzel,

    But, micromanage what?

    I see it like this: if they inflate at a constant rate, the inflation becomes less and less powerful proportionally speaking and eventually has the same effect as an actual reduction in the rate of growth, so they'll get a pullback/bust.

    But if they explicitly raise rates and slow growth, they get a pullback/bust.

    What's the point? Why ever slow things down on purpose? I don't understand why CBs would ever be concerned about an economy "overheating" when they're fully in control of it.

  4. Yiou understand that. I understand that. But they don't

  5. Wenzel,

    I just want to make sure now: you believe that they were intelligent enough to realize they could create a CB system that they could use to rob people and spread special privilege to their friends in the banking sector, which requires understanding the mechanical implications of their various interventions so that they don't somehow end up screwing themselves and their banking buddies instead of helping everyone... but they don't get that they're the ones overheating the economy?

    Then why do they even see the connection enough to announce "we're raising rates to cool things down"?

    Something just doesn't click for me here. I think these people are idiots because ultimately they're fighting reality. But I don't think they're idiots in the sense that they have no idea what they're doing, and the things they say aren't carefully calculated just like their interventions, to benefit themselves and their friends.

    I just don't see how announcing/implementing a cutback or rate raise helps them.

  6. It's a brain freeze.

    In order to maintain their positions, they have to block out parts of reality.

    There are a lot of really smart guys in DC and if you take things with them step by step, where they have to make small logical conclusions they will agree with you all the way.

    Then they go back to their policy positions and recommend the exact opposite. It's a spin-off of Stockholm syndrome.

    Of course, their are a few who know exactly what they are doing, but for most it is brain freeze.

  7. Wenzel,

    A respectful thank you for your thoughts. It's frustrating for me to accept this, but nonetheless I must until I have a better idea of what's "really going on". I've noticed this a lot lately... you can get someone to Socratically agree with you on the point by point logic but when you step back and ask them to look at the newly constructed big picture it still looks to them like government is necessary and just. Weird.