Beijing Raises Capital Requirements to Stifle Inflation
The Peoples' Bank of China, China's central bank, will
raise bank reserve requirements from 6 percent to 7 percent
beginning September 21. This move is seen as a counter
to slow down lending to inefficient industries in China
because of the huge inflow of speculative US dollars,
which are betting that the Chinese yuan will rise against
the US dollar.
The Chinese yuan or RMB is pegged to the US dollar at
the rate of 8.28 to US$1. Recently, China has come under
strong
pressure from the US to let the yuan float. However,
for domestic reasons, China has refused to do so.
It is highly unlikely that China will let the yuan float
against the dollar, as the government is very conscious
of the damage which may be done if speculators take positions
on the currency. The currencies of Thailand, Malaysia
and Indonesia were hit hard in the Asian financial crisis
of 1997, but China was protected by the dollar peg.
The debate over the Chinese yuan has fueled an inflow
of US dollars into China because speculators are betting
on a rise against the dollar. The exact amount is unknown,
but it has meant a huge rise in deposits in Chinese banks.
It is estimated that the amount of money which has found
its way to China for foreign direct investments (FDI)
alone is between US$60-100 billion this year. The banks,
in turn, have increased their loans to enterprises and
individuals. Chinese economists have
complained that many inefficient companies in the
auto and steel industry have received loans because money
is available.
The move by the Peoples' Bank will take some money out
of circulation and put a damper on the quickly-expanding
economy. But, the appeal of China in the global economy
is now so high that it is hard to say whether it will
be sufficient, or further measures will be required.
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