Politics Slow Monetary Tightening in China
This recent RGE Analysis by Adam Wolfe warrants a second look:
The intersection of two political cycles is a key factor behind China’s delay in implementing the tighter monetary policies its overheating economy needs. In accordance with a short-term cycle, central government officials are moving to consolidate control over monetary policy. Meanwhile, a longer-term cycle oriented toward securing factional dominance within the Chinese Communist Party (CCP) in 2012 is motivating Party leaders to direct funds to local-level cadres through the state-owned banks, potentially exacerbating inflation. These conflicting pursuits may complicate the political adjustment necessary for monetary tightening, including renminbi (RMB) appreciation. Eventually, the short-term cycle will prevail, and China will begin hiking interest rates in Q2 2010. However, the 2012 political transition is likely to encourage a long, slow tightening process, which would increase the risk of asset bubbles.
Read the rest of the analysis, “In China, Politics Trump Monetary Policy.”
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