Tuesday, 10 June 2008

Chinese liquidity

The FT's Lex column looks at Chinese liquidity.

Chinese liquidity[FT - subscription required]

China surprised the market at the weekend, lifting the ratio of reserves that banks must hold by 100 basis points. This is the fifth rise of the year, as well as the biggest, and brings the ratio up to 17.5 per cent.

What does Beijing know that nobody else does? Inflation numbers, due out on Thursday, look like a red herring. Food price indices point to a slight deceleration in consumer price inflation; besides, impounding an additional $50bn-$60bn in bank vaults does little to curb spiralling prices when loan growth is steaming along at about 15 per cent year-on-year.


The article goes on to talk about the fear of hot money inflows estimated to be in the region of $75bn in April alone.

Lex concludes that such measures may not be sufficient and that capital controls are a possibility.

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4 comments:

Anonymous said...

Thanks for highlighting what has the potential to become a highly controversial topic. Grumbling about Chinese currency controls has become quite a sport these days, especially in the US. On the trade front, China certainly has its hands full with cases in teh WTO, and this is just another issue that the US could escalate in these protectionist times.

However, I do wonder whether China in the two GATS cases that the US have brought against them in the WTO (like the Audiovisual services cases) are looking to follow the US example in the Gambling case by just withdrawing the inconvenient commitments, rather than actually comply with their WTO obligations.

In the Gambling case, the US announced last year that it was modifying its schedule of commitments (under GATS Article XXI) to exclude gambling from the scope of its WTO commitments. On the face of it, modifying the offending commitments does seem to be a somewhat attractive solution for China. It could potentially buy itself several years of time (given the complexity of GATS litigation), and if the DSB makes a finding of incompatibility, China could then just make compensatory adjustments in other areas of its schedule of services commitments, which clearly wouldn't be difficult. The US successfully negotiated with the EU, Canada,and Japan to become WTO-compliant in the Gambling case, so it seems like an obvious solution for WTO members who find themselves breaching GATS.

The US successfully negotiated with the EU, Canada,and Japan to be able to become WTO-compliant in the Gambling case on the withdrawal (once Antigua is dealt with), so it seems like an obvious solution for WTO members (like China) who find themselves breaching GATS. Also, the ongoing claim of violation by the EU against the US in the Gambling case (under the current Trade Barriers Regulation on the continued enforcement against EU entities for past activity when the GATS commitment was there) can be easily avoided by not taking such enforcement measures (which are irrelevant in the current China cases).

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