Saturday, April 11, 2009

Is China finally helping with global imbalamces adjustment?

It is necessary to assess whether China is taking the right steps by increasing is money supply in such a magnitude, 25.5 percent. Clearly, global imbalances have as a starr the Asian giant, however, the increase in lending from its central bank to commercial ones is a risky move for the world as opposed to let the yuan appreciate.

Let's not forget than any country with a currency peg losses it's monetary autonomy. Thus, by increasing it's money supply, China is pressing further on the opposite direction of the appreciation needed. So how can this policy help global economy out of recession? It can not.

This policy can help China to get out of it's slow growth but it will not correct global imbalances. It is true that there are no incentives for China to correct it's huge trade surplus, but an increase in public spending -as opposed to a monetary one- can yield two desirable effects. First it will cause the yuan to appreciate, thus reducing further the trade surplus -recent figures show that it has dropped significantly in the first quarter of 2009 by 45 percent with respect the previous quarter. Second, it would drive domestic consumption up, increasing China's demand for imports and correcting further global imbalances, helping deficit countries such as the U.S., U.K. and Spain in their delevereage.

So, the increase on money supply is only good news for China and serious structural problems must wait to be addressed.

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