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Towing the line of ideal liquidity

Monetary policy in China has been all over the news lately with the PBOC winning the award for central bank of the year. At the same time while China’s central bank has been commended for its success in stimulating the economy and promoting infrastructure development economists are aware that real challenges for the bank are right around the corner. China’s bank is faced with the challenge of strengthening liquidity while at the same time beginning to reel in the increase in money supply which has hovered over 13% the last two years and which is on pace to reach a similar level this year. The desire for loans is still high and recently the Shanghai Securities News reported that the top four state banks speeded up new lending in January by 50 billion yuan from 270 billion yuan a year earlier.

However, while liquidity is necessary to finance the investment in the infrastructure that is facilitating growth much of the money that is being borrowed is being tied up in assets are loaned out to smaller businesses which has increased debt risks that are a growing concern. Moreover, potential growth is falling as the population ages and resource and environmental constraints necessitate reforms and adjustments that will further slow growth. In regard to these concerns the “PBOC will push financial reforms, including widening the issuance of interbank certificates of deposit (CD) and increasing the two-way float of the yuan” in the hopes that it can tow the line between preventing cash crunches and debt risks.


  1. Ultimately this is about credit creation. How does “liquidity” (definition of this metric?) affect credit (ditto, defined as…)? Without a sense of that, we can’t really judge monetary policy goals and effectiveness.

  2. gjeong gjeong

    This is an interesting article and post about Chinese Economy.
    PBOC was awarded as the central bank of the year, and it will try more strategies/ideas to grow the economy. However, as you Paul mentions, these is a concern with the current situation: the credit/debt issues. Without figuring out how to react to these consequences, the economy might not grow as fast as it should.

    • And what should be the goal(s) of a central bank? Without that, we can’t evaluate whether the PBOC has been doing a good job.

  3. […] Interbank lending rates in China are rising and have been for months. One reason for the increase is market volatility. Back in June rates spiked after a rumor of two mid-size banks defaulting on their loans. In recent months rates have inched up as cash reserves dry up as the PBOC attempts to reduce the debt risks (for more information, refer to my previous post). […]

  4. maxstadts14 maxstadts14

    Last semester in the China class we talked a lot about the over investment in China–how cities were building themselves with the hope that people will flock to them, though in practice they are just built up and standing empty (ghost towns). Lots of the finance to build this non-demanded infrastructure comes from heavy borrowing. You talk about lots of borrowing being tied up in assets in the beginning of the second paragraph. For these “cities'” sake, the only hope is for the unused cities to become populace, otherwise there is not much hope to pay back these giant loans.

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