Critical Analysis of Baby Steps toward Tighter Money in China Article - Essay Example

Baby Steps toward Tighter Money in China “Baby Steps toward Tighter Money in China” by Richard Silk points out atChina’s central bank to curb the public’s mounting debt that may perhaps engulf the economy if left unattended. Attempt of limiting the ever increasing debt is considered as a long term plan aimed at controlling the economy. The looming debt is brought by increasing inflation, roaring house rates as well as renewed capital inflows. Unless China takes a calculated move towards her debt control, it may worsen her situation in future because of the probable unfriendly consequences that may accompany their wrong decision. According to Silk, constraining lending may actually fit the authorities objective of driving the economy towards consumption led growth instead of investment driven model, though it may not be an easy task as such (Web). He argues that the action by the central bank may do more harm to the already shaken economy which was upset by serious cash crunch earlier this year. The People’s Bank of China seems to have number explanations to be more aggressive including the expected rise in Consumer price inflation which was 3.1% and hiking house prices which was 8.2% in September. Also, the U.S are also pumping more capital in China as a way of keeping her (U.S) economic stimulus in place and this may really heighten inflation in China. It is therefore important for the PBOC to pull out these cash from her systems as a way of controlling her economy. However, Silk argues that the good news is that China is an emerging economy and therefore it may endure the economic challenge currently than earlier in the year (Web). The People’s Bank of China sapped 58 billion Yuan from her interbank market thus making the seven day reverse repo rate go up by 4.7%. It finally led to loosening of liquidity and the move was interpreted by some economist as a way of ceasing lending. Move to control the rising debt by the PBOC has had several effects including rise in interest rates and tumbling of stock markets. Debt has experienced a rapid growth which greatly interfered with social financing as well as outstanding borrowings by both businesses and households which really worries the economy. However there is mixed reaction from the optimists and the pessimists of the government move to curb debt (Silk Web). The fact that PBOC should instill a more balanced lending is indeed very wise but the question lingering is the depth of the control. Actually this article points out at one of the tests facing the emerging China’s economy, although a few are predominantly lethal. Funny enough, not even Silk understands the massiveness of this action. Indeed a system of debt control is very important since it is the root cure of the harsh condition. Indebtedness has been one of the greatest struggles with the local government but was worsened by the Beijing’s post 2008 stimulus plan after warnings went unheeded (Silk Web). It is therefore obvious that need to stay afloat by borrowing more and the initiation of creative financial products and regulations are the main cause of the high debt. Policies and responsible institutions are therefore the major failures who have led to the looming crisis in the emerging economy. Perhaps politics was allowed to make economic decisions instead of relying on economic experts. China should therefore be careful enough not to let politics take charge in this. The move to control debt is welcomed but the question remains on how it should be effectively done so that it does not sink the economy (Silk Web). Sensible and effective sound debt control accompanied with clear governance may be the only solution to the problem. The move by PBOC to restrict credit environment may turn out to be worse because it may eventually be felt by their trading partners thus leading to slower economic growth and eventually pressurize the commodity market. This move, although may be expected to curb inflation, it may, to some extent result into slow economic growth. This is because real estate developers and other borrowers may complain of the dried up credit as well as insufficient funds to enhance demand (Silk Web). Generally, when the businesses such as real estates are down, they may downsize their employees thus leading to unemployment. Manufacturing companies and other industries’ growth may be slowed down by the credit control move thereby creating a serious economic crisis. Nevertheless, China’s move to curb the rising debt may also be termed promising because it would later lead to sustainable home price and further manage the inflation. Just as Silk explains it, tightening stance by the PBOC may reduce inflationary pressures and avoid recurrence of shadow banking. The liquidity tension may endure if the central bank does not inject cash even though the bank cannot allow the cash crunch to repeat itself as it may lead to systematic malfunction. China’s growth may stumble if the issue is not addressed promptly. China has ever salvaged her debt crisis some years back and therefore there is confidence that it can still do it again. Although it may be argued that the extensive PBOC’s reserve may just have enough money to recapitalize banks, this is actually debatable. This makes China’s case different from other countries such as U.S which does not have enough reserve. The biggest threat to China is external debt but not local debt because the rich PBOC can recapitalize her banks. The article has actually listed down the challenges prompting PBOC to introduce debt control measures. Silk has also pointed out at some of the economists supporting the move and arguments given out by the PBOC to support their move. Actually, all banks are supposed to control the local banks when it comes to all the monetary issues. According to Silk, the PBOC must ensure they take a precautious step while handling this issue because aggressive move may aggravate strains on the financial sector. Silk’s article does not concentrate much on the possible negative consequences of PBOC action but rather dwells much on the goodness of undertaking the move. Works Cited Silk, Richard. Baby Steps toward Tighter Money in China. The Wall Street Journal, 25 Oct. 2013. Web. 28 Oct. 2013. . Read More