The China Syndrome
by Charles Mackay, Sunday October 16 2005
wallstreetexaminer.com
China's got it - no, not another contagious new flu, but rapid monetary growth and a strong economy.
The latest report from China shows that its September M2 money supply is growing at a highly inflationary 18% year-over-year rate. The People's Bank of China's M2 target is an eye popping 15%, which was easily exceeded. China's M2 now is roughly half of the US's and catching up fast. In addition, the expected slowdown in the growth of its foreign exchanges reserves did not materialize. Foreign exchange reserves grew $58 billion in the third quarter, after a $52 billion rise in the second quarter and a $49 billion rise in the first. China has so far maintained about 70% of its foreign exchange reserves in US dollars.
It appears at first glance that current worldwide inflation may be mostly traced to the People's Bank of China's rapid expansion of its monetary base. Looking closer though, we find China is substantially driven to inflate its money base, and consequently its money supply, as a means of maintaining a stable exchange rate between the Yuan and the US dollar. Ultimately then, US monetary policies are provoking the actions of China - which is now producing new money faster than any other country.
Alan Greenspan stated yesterday, while attending the Group of 20 meeting in China, that they (the Chinese) were 'lucky' to have "benign economic conditions" in the last few years that did not threaten their financial system. No Fannie Maes, no Enrons, no Refcos; no devastating natural disasters to make market participants question the integrity of their financial markets. No need to exercise the Zhou Xiaochuan put when Chinese stock markets swoon (Zhou is the governor of the People's Bank) . Truly the People's Bank has not yet attained the revered status of the Fed - as creator and master of financial speculation.
Greenspan even provided the Chinese with a brief history of contemporary monetary policy. Hopefully the Chinese will take notes on what not to do and learn how to avoid recurrent financial crisis, fraud in the financial sector, and inflationary money policies. Ok, they'll have to work on that last one pretty hard. Perhaps if they can make a clean break from the engrained practice of US dollar intervention, they will be able to reduce hyperinflationary rates of money supply growth. But if the cure (slow growth) looks worse than the disease (inflation), they may be able to live with this high growth/high inflation syndrome a while longer. |
