Beijing (AsiaNews/Agencies) – China’s central government has moved to rein in runaway inflation and skyrocketing asset prices by draining cash out of the economy. The People's Bank of China yesterday forced banks to keep more money on hand by raising the reserve ratio by half a percentage point to 16 per cent, effectively curtailing their ability to extend more cash to businesses.
This is the first time since November 2008 that the central government has raised the reserve ratio. Earlier in the day, it raised the interest rate on its one-year treasury bills and last week it raised the rate on its three-month bills, increasing borrowing costs.
Economists said the government is starting to restrain its stimulus package, which it put in place last year to cope with the worldwide financial crisis.
Mainland banks approved a record 9.21 trillion yuan to stimulate the economy in the first 11 months of 2009.
Experts have reacted positively to the central bank’s decision, saying that excessive borrowing was dangerous.
“If the government continues with the same strength of macro-economic stimulus as in 2009, there will be notable economic overheating in 2010,” Yao Zhizhong and He Fan, economists with the Chinese Academy of Social Sciences, said a few days ago,
The main dangers are inflation, too much cash in the economy, and a potential real estate bubble. If the latter does burst, the real economy, and activities correlated to real estate, would suffer badly. Unemployment would likely go up.
However, the government move has had a negative impact on markets. Both the Honk Kong and the Shanghai stock indexes fell by more than 3 per cent on Wednesday afternoon.
Contrary to expectations, industrial output is also expected to decline. What is more, observers are waiting to see how stocks will react in Europe and the United States. Both are key markets for China’s industrial goods.
