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China Raises Reserve Requirements Again

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Tags Financial MarketsMonetary Theory

01/06/2007

China again raises reserve requirements of banks . This was the fourth time in just seven months that they did this. If they keep this up, fractional reserve banking might be ended in China soon!

No, not really perhaps, but it is clear that Chinese leaders are increasingly anxious to rein in credit expansion, especially since they've also imposed curbs on investments in specific industries, most recently auto manufacturing.

What is curious then is the refusal of the Chinese leadership to significantly accelerate the rate of yuan appreciation. The rate of yuan appreciation have accelerated somewhat, with the yuan rising 2,4% during the latest six months, compared to a 1,5% increase the previous twelve months, but it is still moving too slow. And since the underlying cause of the rapid credit expansion that Chinese leaders are now trying to rein in is the massive build up of foreign exchange reserves, reducing that build up by tolerating a higher yuan exchange rate would have similar effect in reining in credit expansion. And it would also have a lot of other positive effects, such as reducing the cost of oil and other imported goods, reducing the inevitable capital losses from a continued build up of foreign exchange while also reducing the risk of and vulnerability in the case of protectionist legislation in America and elsewhere.

And while it would perhaps reduce growth somewhat in the short term, that is no different from the effects of raised reserve requirements and investment curbs.

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