Wednesday, April 6, 2011

Mainland Chinese Bubble Worries

The People's Bank of China (PBoC) is currently tightening, a move that's beginning to moderate inflation. There's a fear, though, that once inflation is under control the PBoC will go back to an easy-money policy in order to spur economic growth. Given the state of the real-estate market, that possibility is raising concern about a full-fledged Chinese bubble.
[R]unaway price increases are not on the cards. The far bigger worry is that with inflation stabilising, officials will feel little urgency to raise interest rates much higher -- and that low real rates for an extended period will greatly increase the risks of over-investment and a property bubble in China.

To be sure, no one is forecasting a relaxation of monetary policy, just a gradual phasing out of tightening moves....

"Our view is that the central bank may have a brief period of policy pause, amidst the growth slowdown and better-behaving lending activities," Dong Tao, an economist with Credit Suisse, said in a note.

"The pause is unlikely to be publicly announced, in our view, but the authorities may have more tolerance towards lending activities," he added.
Adding to the bubble pressure is depositor interest rates remaining below inflation.

Although the article centres on property speculation, negative real rates on deposits will spur more gold buying. Buying gold is officially encouraged, and a negative rate will provide further incentive.

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