To consider China’s free cash reserves

To forestall possible economic downturns, is better to consider China’s free cash reserves. This can fuel the inflationary pressure – not only in China but also throughout the world. In addition: the ECB and the FED stir with its expansionary monetary policy to inflation. China’s growth is in the 2nd Quarter of 2012 at 7.8%, as well as exports, investment and industrial production to fall short of expectations. The government fears rising unemployment and political discontent.

This is the reason for the People’s Bank of China, the reserve ratio cut, starting from a level of approximately 20% for the third time by another 0.5 percentage points. For China’s state-controlled banks an estimated 50 billion euros are provided more liquidity. The Chinese central bank opens so forth immense liquidity reserve, which it has since the turn of the millennium accumulated in response to the low interest rate policy of the United States and the resulting speculative capital inflows.

The so-called “sterilization policy” has long been necessary for the stabilization of the exchange rate. The price of Chinese exports in the world markets were kept low in this way and it allowed China an export-driven growth. The central banks of the major industrialized countries could in turn keep interest rates low because cheap Chinese exports dampened inflation.

The reserve policy of China (and many other emerging economies) was thus a key reason global low inflation and interest rates. Now it seems that the Chinese central bank to let the spirit of inflation out of the bottle by the cash reserves gradually releases. This prevents the short term, an economic slowdown in China, but it brings long-term risks for China and the world economy.

First, the government directed the banking sector of China to finance of new investment projects. Yields on Chinese investment and the soundness of the credit portfolio of the Chinese banking sector will continue to decline. Second, capital that is even more speculative will find use, increasing the likelihood of speculative excesses (e.g., the real estate market) and later a crisis in China increased.

Third, the risk of inflation rising in the prices of goods. As a rule, first the prices of food and energy prices rise, probably, fourthly, the political discontent of the population increase.

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