China Priming the Engine – Monetary Policy Easing

In the first quarter of 2012, the economy of China grew 8.1%. That’s a problem – but not for the reasons you think.

Let’s compare that for a moment to some of the world’s other economies. The USA remains the largest economy in the world. In the same period the US economy grew by 1.9%. That’s a problem for President Obama as sitting presidents are rarely voted back into office when the economy is doing poorly. (Just ask George H.W. Bush or the “he who will not be namedJimmy Carter.)

In Japan – the world’s third largest economy – growth rate for the first quarter was 1.2%. That’s anemic especially as the country rebuilds after the Fukushima earthquake, tsunami and nuclear disaster.

Germany was 1.7%. As Sonny & Cher once sang, “The Beat Goes On.”

So. Back to our problem. Why is 8.1% quarterly growth causing concern in China?

First it’s the horrible growth rates seen around the world. China is an exporter, and if other economies are plodding along they will be less inclined to buy anything and everything with a ‘Made in China’ sticker on the bottom.

Second, a growth rate of 8.1% is below initial expectations of 10% or more. And while a 2% decrease sounds paltry that’s a greater level drop than other countries above are even reporting.

Every decrease means fewer factory orders, less infrastructure and fewer jobs. The last thing Chinese leaders want are hoards of unemployed migrants streaming back to their villages once they’ve had a taste of big city life.

To combat dropping economic activity, China is unleashing a range of monetary policies to keep the wheels humming:

  • Widened Currency Trading Range – In April the People’s Bank of China expanded the trading range for the RMB against the US Dollar. The Bank sets a daily exchange rate then limits trades to a narrow band. That had been 0.5% of official rate. Now that is 1%. (Read more here at The Wall Street Journal Asia.)
  • Increase Bank Lending – In May, the volume of bank loans increased – showing again the central bank is encouraging other banks to make more loans. These will drive investment – and hiring. Economists predict the rate of lending will increase over the course of the year. (Again The Wall Street Journal Asia.)
  • Stimulus Spending – China needs more railroads. Right? Perhaps a super highway or two? Analysts predict the rate of infrastructure spending to increase this year, as national government investment will fill in for sagging private investment. But it also appears “stimulus” is a bad word in China after reckless over-spending in years past. It is likely to be called “direct investment” perhaps?

These are some of the ways China is loosening the purse strings to keep the world’s second largest economy humming. More bank loans, easier currency trading and a big wad of government cash may be enough to lift the economy out of the doldrums.

All that said – if Obama was grappling with 8.1% growth his worries would be over!

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