Thursday, July 4, 2013

China takes control of its Currency

The Chinese government has recently reaffirmed its commitment to lead a prudent monetary policy. A message was signaled to all banks and other Chinese companies and foreign business partners. After a recent meeting, the Chinese government issued a statement which reads: "China will continue its prudent monetary policy in ensuring growth of credit to the real economy, the agricultural sector and small businesses." "Will continue", says the text, and in fact, the direction is not new. Publicly adopted in 2010, it is associated with a budget "proactive" policy, in force since 2008. On the issue of the exchange rate of the Yuan, the Chinese government encourages the continuation of the current rate "to a basically stable level." So if the Yuan is revalued, it will be a movement of low amplitude. Already at the end of last year, the new administration had announced their resolution to "expand wisely the amount of social financing to ensure a moderate emissions growth of loans." The Chinese economy is facing a double challenge: The first and foremost one is to maintain a growth rate of around 7% to ensure the increase of the population's standard of living and inflation under control, and the second one is to set right their export market which was seriously damaged by the European debt crisis which considerably reduced its export markets. To answer the western financial crisis, the Chinese launched in 2008, a multi-year recovery plan 4000 billion Yuan. They slowed and the slowdown the growth of their economy, but still fear that the financial crisis in their main customers being turned into an economic crisis, if the growth rate falls more below. The temptation is strong in these conditions, increasing the money supply. They have repeatedly reduced the benchmark interest rates and reserve requirements for commercial banks. But then tip the risk of inflation, which is not only a malfunction of the economy, but also the source of popular discontent, and thus a political danger. This is why banks are expected to deal with the "real economy", rather than seeking sources of short-term profit, spontaneous tendency of any financial institution. In this framework, they will be encouraged to provide loans. They will not be to fuel property speculation. The message is clear to European countries that China needs to export; it has no incentive to engage in any trade war. But it will remain master of its currency.


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