Can China Conquer Its Mountain of Money?

By Shlomo   Maital 

        money mountain                  

   During the global financial crisis, China’s economy should have been hard hit.  As Western economies’ demand for exports collapsed, China should have imploded. But it didn’t.  After a short pause in its growth,  the near-double-digit growth resumed.

   One reason?  China’s Central Bank rapidly and massively expanded the money supply, making credit exceptionally cheap and easy to get.  China’s money supply (M2) grew by 30 per cent at the end of 2009.   Credit growth has slowed but is still very rapid.  M2 grew by 13.6 percent last year, about the same as in 2012 (13.8 per cent). 

    Overall, the amount of money in China has tripled since the end of 2006.  One result has been to create a huge housing bubble and asset inflation.  Hence, buying a very modest apartment in Wuhan, reports Keith Bradsher, in the Global New York Times, now costs about $100,000,  or 14 years of pay at $575 / m. for an average industrial worker.   Unaffordable.

     In the U.S. and U.K., central banks created easy money (quantitative easing) by buying bonds, thus injecting reserves into the system.  It was only partly effective, because banks chose to hold on to the cash rather than lend it, to shore up their ravaged balance sheets.

   In China, monetary policy works differently.  China buys huge amounts of U.S. dollars and Treasury Bonds and Bills, in return for renminbi, to keep the renminbi from growing stronger, and to maintain its undervalued exchange rate at about 6 RMB per buck (it probably be around 3.5,  based on purchasing power).  This keeps China’s exports cheap.   Currency manipulation is illegal, but – not much can be done.  If the U.S. screams too loudly, its multinationals will use their valuable cheap production sites in China and Apple, for instance, could cease to exist. 

    The problem China now faces? How to rein in that mountain of money, and keep it from generating inflation, or keep the housing bubble from bursting when the mountain starts to shrink (or grow more slowly)?   America has failed at a much smaller task – ending Wall St.’s addiction to quantitative easing and free money.  Will China do better?   We should all watch China closely, and hope that wily Zhou Xiaochuan, longtime People’s Bank of China governor, will succeed.  If he fails, we will all feel the pinch.