Riding the Tiger
Appropos of my recent blog earlier this week on the causes of China's inflation, it has just been reported that March saw a surge in internal (yuan) currency loans by Chinese banks of 1.01 trillion yuan (equal to $160.1 billion) far above the 710.7 billion yuan lent in February. More significantly, this was the biggest deviation of actual from forecast loans in more than a year. New yuan lending clocked in at 21 percent above the median estimate of 797.5 billion yuan calculated from a Bloomberg survey of 28 economists. This is no accident since the Chinese government began loosening restrictions on lending capacity for three of its four biggest banks last month in an effort to preempt the fall of the economy's growth rate in the last quarter, which is expected to be announced today as 8.4 percent, the lowest in eleven quarters. The government has also committed to cutting the reserve/deposit ratio of lenders by an additional 50 basis points this month, further loosening its monetary policy that caused a 13.4 percent year-over-year growth in the money supply in March. This latest news makes it likely that the People's Bank of China will exceed its broad money growth target of 14 percent for this year.
It has now become clear that the Chinese government has made its choice to avoid a "hard landing" by attempting to ride the unloosed inflationary tiger for as long as it can. But its strategy of massviely expanding fictitious bank credit unbacked by real savings will cause added distortions and exacerbate unsustainable imbalances in China's real economy. As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process and will precipitate a "crash landing" that may well shatter China's burgeoning market economy. This would be a tragedy of the first order for the entire global economy.