Will the Chinese really tighten?

December 6th, 2007

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Today, we saw this news article, China Plans `Tight’ Monetary Policy Next Year to Cool Economy,

China plans to shift to a “tight” monetary policy in 2008, signaling the government may raise interest rates further and allow quicker currency appreciation as the economy heads for its fastest expansion in 12 years.

Do the Chinese authorities have the will to really tighten their monetary policy? This is not the first time they say they will be doing that. Furthermore, they have been ‘tightening’ monetary policy for quite a long while already, with no success (see What makes monetary policy ?loose? or ?tight??). They had tried many things, from price fixing, price controls and decrees and yet met with no success as price inflation is still running red hot. The only effective way to tighten monetary policy is to let the yuan appreciate significantly. But if they do so, the risk is that they may accidentally lose control, turning a slowdown of the economy into a rout (deflation).

Is the Chinese financial system really that much healthier than the US financial system? Well, we can be sure that there are heaps of bad debts around in China. When the monetary tide recede, we can see which companies and businesses have been swimming naked.