odin

What Happens in China Doesn't Stay in China

Its perhaps the years I have spent practising this trade that makes me sound silly but reserve requirements are one tool -- a blunt tool -- to manage the money supply. China CRR is 15.5%, the US is 10%. Furthermore, you will find that the US pays interest on excess reserves and the actual reserve ratio is much higher (lending is depressed). Given these levels of reserve requirements, perhaps you will be kind enough to explain how bank stability is much superiorly managed in China. Comparing to what happened during the credit crisis, as loans go sour, I doubt you are claiming that extra 5 1/2% reserve cushion is what makes the difference for financial stability.

We wont repeat the level of loan growth in China (the numbers have been hashed to death all over this site) but just as a comparison: the M2 YoY is growing at 28.2% in China. The equivalent number is 8.5% (4% seasonally adj) in the US. In light of these numbers, tell me how China has more of an ability to CUT rates.

The problem with China is not lending -- it is to whom they are lending. Continuing to support and subsidize export-oriented industries is simply building overcapacity and will lead to souring loans. Small and medium enterprises catering to internal demand are actually getting starved for credit. This is not making things competitively. This is a wholesale transfer of wealth from the workers in China (by reducing their buying power) to the exporters in China.

You can continue to keep your currency artifically low, keep interest rates low, and continue to allow asset inflation but we have seen how that script ends.

This is not intended to bash China (and China does have a bright future) but to point out a growing problem that threatens the stability of everyone (again) less than a year after the credit crisis. Now if you have been a "domain speculator", perhaps you do revel in the highs and lows of speculation and undoubtedly many make their fortunes during these times but then lets call it speculation and not couch it in pseudo-economic terms.


On Aug 26 02:06 PM Dave Wrixon wrote:

> Yes, and you are another one that has no clue what he is talking
> about.
>
> The whole point of reserve ratios initially was to ensure the stability
> of banks. In other words it ensure that they were not creating too
> much money out of thin air.
>
> In China's case they actually use them to control the money supply,
> in a similar way to which both we and they use interest rates to
> control the money supply. If Western nations had as interest rates
> and reserve ratios as high as the Chinese their economies would sink
> without trace. This simply underline the real financial strength
> in China and shows that, however, much of a bubble you think the
> Chinese might have on their hands their ability to unleash money
> into the system without getting a penny into debt is almost unlimited.
> Of course the reason they have this power is that they make things
> and they make things very competitively. This is why we are lead
> to believe that their economy is on the point of collapse!
>
> Do you guys have any idea how silly you sound?