“Trust in me, go to sleep,” – the objective of China’s Central Bank

 

 

 

kaa6.jpgSource of picture: www.forums.comicbookresources.com

 

 

By John Richardson

I loved the analogy in yesterday’s Lex column in the Financial Times, comparing the objectives of any central bank to those of Kaa, the python in Jungle Book (nice excuse for a picture to brighten up the blog).

The serious point is that while issuing assurances that overall policies supporting growth remain in place, the job of any central bank is to at the same time gradually stifle signs of overheating without alerting the rank-and-file noticing.

China failed in late 2007 to lull the average girl or guy in the street to sleep – as we’ve noted before – through introducing overly harsh slowdown measures that caused the country’s last big economic contraction.

The raising of the reserve requirement ration to 15.5% from 15% for big commercial banks - which was announced last week and came into effect yesterday – was hardly likely to go unnoticed.

As a senior contact we spoke to yesterday commented, polyolefin prices “paused for breath” at the end of last week on the news as other commodity and equity markets slipped very slightly. 

But nobody is pressing the panic button as yet.

Lex adds, though, that fourth-quarter GDP (gross domestic) numbers are due out on Thursday.

If these indicate what the government agrees are more signs of dangerous overheating, then other measures might be taken sooner rather than later – perhaps interest and/or deposit-rate rises.

Previously, we had been told that further tightening using one of the three big economic sticks (bank reserve requirements, deposit or interest rates) was unlikely over the next few months – and possibly not until the second half of the year.

The risk of investor panic might cause hesitation, though, despite the data meriting swift measures; it’s very hard for China to do anything these days without what seems like infinite scrutiny.

In other words if China fails to act soon – because it’s caught in the global economic headlights with no chance of  escape - it could be storing up bigger problems for the future.



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