China to world: here, you pay for our inflation

More news apropos old posts:

China raised interest rates for the fifth time since March to curb the fastest inflation since 1996 and damp speculation in stocks and real estate.

The benchmark one-year lending rate will increase to a nine-year high of 7.29 percent from 7.02 percent, starting tomorrow, the central bank said today on its Web site. The rate has risen from 6.12 percent on March 17.

China is flooded with cash from a trade surplus that reached a record $161.8 billion in the first eight months of this year, pushing up consumer prices at twice the central bank’s target pace and raising the risk of asset bubbles. Premier Wen Jiabao is trying to cool the world’s fastest-growing major economy without triggering a sudden slowdown that may cost jobs and leave factories idle.

As I detailed with the previous post, I honestly believe we’re in, entering, facing, an era in which monetary policy faces real obstacles, in re the ability of a foreign money supply to seriously hinder a central bank’s ability to manage the macro economy via the domestic money supply.

In the case of China, specifically, I fail to see how anyone can continue to believe that interest rates are the first-best policy response, when their Renminbi remains so low. Having said that, of course, they’ve waited so long that they really are bathing in cash:

China’s money supply remains too high despite a slowdown of M2 in August. Newly released central bank data shows that China’s broad measure of money supply (M2), which covers cash in circulation and all deposits, rose by 18% in August, lower than the 18.5% in July.

The central bank figures also indicated that, during the first eight months, China’s new renminbi-dominated loans reached 3.08 trillion yuan, nearly last year’s total, pushing up urban fixed assets investment by 26.7% in the first eight months.

So – same problem. Jack up interest rates, and foreign capital will seek you out. Jack up your exchange rates, and foreign capital will seek you out – except putting the Renminbi at nearer a proper value (i.e. reflecting the value of the Chinese economy and all the cash floating around in it) will slow their economy right down, which I would expect will turn a lot of those investors away.

I basically come back to where I ended up last time. China needs to embrace a slowdown, a real slowdown, with all the unemployment and empty factories that that will entail. And ‘we’ need to embrace their problem, and offer all of the expertise we can, rather than just having our hedge funds invest in their censorship surveillance technology (the fucking bastards).

Just think. Give China a real business cycle, give them bad times, then good times. Give China’s people a reason to save and invest, and a sense of entitlement to government protection during downturns, with a willingness to pay taxes to secure that protection. Maybe taxes for the provision of public utilities to serve their new private homes and other investments. What do you have? You have what the rest of us have, dammit. Capitalism. Do we win or what?

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