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Yardeni on Chinese Monetary Policy

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Yardeni on Chinese Monetary Policy
Recently, Chinese Premier Wen Jiabao said that economic policies may be “fine-tuned” and pledged support for smaller companies that have been hard hit by a credit crunch as monetary policy was tightened to fight rising inflation. The CPI peaked this year at 6.5% y/y during July and fell to 5.5% during October. Wen’s fine-tuning announcement suggests that the balance of risks had shifted from inflation to growth.
The central bank may cut reserve requirements for smaller lenders to free up credit for small companies hit hardest by a credit squeeze. The People’s Bank of China raised banks’ reserve requirement ratios nine times from November to June to a record 21.5% for the biggest lenders. The rate for smaller lenders is 19.5%. That tightening along with interest rate hikes significantly slowed the growth in M1 (measured in yuan) from a peak of 38.4% y/y during January to 9.2% during October. Yuan-based M2 growth slowed from 29.7% during November 2009 to 12.9% during October. However, bank lending was 586.8 billion yuan ($92.5 billion) during the month, the most since June, exceeding the previous month’s 470.0 billion yuan. In China, the government guides lending levels.
On the other hand, Chinese officials have stressed recently that they are not prepared to ease up on property restrictions that are depressing that market. A week ago, Premier Wen said in a television broadcast, “There won’t be the slightest wavering in property-tightening measures; our target is for prices to return to reasonable levels.” How bad is it? In Wenzhou, where house prices have dropped sharply, a real estate developer is giving away BMWs with each apartment that is purchased to the first 150 buyers.
House prices have started to fall nationwide. This is coming as a shock to many Chinese who assumed that prices would continue to rise. Sound familiar? The difference is that in China, homebuyers actually are required to put up large down payments when they take out a mortgage.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. In his publications, Dr. Yardeni explores trends in the economy and financial markets which are vital to a broad spectrum of investment decision makers. He has taught at Columbia University’s Graduate School of Business and was an economist with the Federal Reserve Bank of New York. He also held positions at the Federal Reserve Board of Governors and the U.S. Treasury Department in Washington, D.C.
Dr. Yardeni completed his doctoral dissertation at Yale University under Professor James Tobin, a Nobel Laureate. He has a Masters degree in International Relations from Yale and completed his undergraduate studies magna cum laude at Cornell University.
Dr. Yardeni has published articles in The Wall Street Journal, The New York Times, and Barron’s. He has appeared on numerous television and radio business and financial programs. Many of the world’s top institutional investors subscribe to Dr. Yardeni’s investment strategy service, which is available at www.yardeni.com.


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