By: Feng Dong
China’s central bank moved to tighten monetary policy on Tuesday, raising the bank reserve requirement ratio by 50 basis points and slightly increasing the interest rate on its one-year bill by 8 basis points to 1.84 percent.
The credit-tightening moves reflect concerns over a possible rise in inflation this year as China’s economy continues to rebound from the global financial crisis. Inflation is clearly a top policy priority and the threat of inflation is taken seriously by the Chinese leadership. After a huge stimulus package to boost the economy during the financial crisis and years of talks about the asset bubbles in some of the big cities, such as Beijing and Shanghai, the increasing concerns about inflation have been hotly debated within the country, more so than foreign commentators could generally imagine. These moves provide further hints on the possibility that China might allow its currency, the Yuan, to appreciate at some point this year. Much of the inflation the country faces is considered to be import-driven, particularly by the soaring commodity prices in international markets, and some proper appreciation of the home currency offers leverage to counter that effect.
However, it does not mean that people could expect much beyond what is most likely to be a mild move adopted by the Chinese government in that direction. The leadership attaches particular importance on issues like unemployment in their economic decision-making process in order to maintain social stability, therefore it has to find a perfect balance so as not to allow currency appreciation to hurt exports where tens of millions of jobs are supported. It is true that the most recent data shows Chinese exports are back on track, but given increasing concerns over a global resurgence of protectionism under harsh economic environment, it is unlikely that the Chinese government would be bold enough to make a big move.
