Central bank official denies excessive money supply to blame for inflation
09:17, November 16, 2010Email | Print | Subscribe | Comments | ForumIncreases the bookmark
In response to the claim that rising domestic inflation has been triggered by the central bank pumping too much money into the market, Zhang Jianhua, chief of the Research Bureau of the People's Bank of China, said the claim was "groundless" either theoretically or in reality.
There has been criticism that some 4.3 trillion yuan of excessive money was injected into the market. Zhang insisted that it is not reasonable to deduce a proper result of money supply information by deducting GDP, a variable, from the amount of money supply, a concept of stock. It is even more irrational to deduct a three-quarter GDP from money supply at a certain point of time. However, China's money supply in 2009 has still been found to be too high if M2/GDP, the widely used method of calculation is applied. Zhang thinks that is just a special phenomenon which has resulted from the moderately easy monetary policy as a contingency in the context of the global financial crisis and cannot be regarded as any indication of a further rise of M2/GDP in the future. He explains the two reasons for the high growth of China's money supply. On one hand, China's surplus in both current accounts and capital accounts has led to massive expansion of base money. On the other hand, the central bank's policy of raising the banks' deposit reserves requirement and high credit grants by commercial banks have brought banks' cash reserve ratio down. Zhang agrees that China should restore a prudent monetary policy in the next period of time. The central bank has declared recently it is attempting to "normalize" the monetary environment and has taken the first step by raising banks' deposit reserve ratio by 0.5 percentage points from Nov. 16, which means the freezing of some 350 billion yuan. China's consumer price index, the indicator for inflation, has soared to 4.4 percent in October. That has sparked concern for high inflation and expectation for interest rate hikes by the central bank, particularly after the United States declared further quantitative easing by pumping another 600 billion U.S. dollars into buying treasury bonds. By Li Jia, People's Daily Online Related Reading
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