News In Brief

China’s problem

Paddy Hirsch Aug 29, 2011

If there was any doubt that the global economy has bifurcated, it was removed by news from China today.

China is jacking up its bank reserve requirements, demanding that Chinese lenders store more of their money with the central bank, effectively preventing them from lending so much. China’s doing this because it’s worried that its economy is overheating and it wants to cool inflation.

Compare this with the US, where banks are piling money up at the Federal Reserve, even though they don’t have to. They’re stockpiling cash at the Fed because they can’t, or won’t lend it out.

China’s economy is booming: ours is stalled.

American banks say they’re hoarding cash because there’s no demand. That’s true, to an extent. Corporations, which borrow the most, are not expanding, and they’d rather stockpile their own cash right now than rack up any debt. Meanwhile, homeowners and consumers who might want to borrow can’t get a loan, because they’re regarded as too risky.

The reserve requirement for banks is one of the primary monetary policy tools used by the Chinese government. It’s rarely used by the Fed, which prefers to use open market operatens (buying and selling bonds) and adjusting interest rates. But China doesn’t think much of interest rates as a tool, so it goes with reserve requirements instead.

Bloomberg reports China has already raised reserve ratios to a record 21.5 percentfor the biggest banks to counter the fastest inflation since 2008. The move may drain 900 billion yuan ($140 billion) from the banking system over six months, Bloomberg reported.

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