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Changing dynamics of Chinese Economy

Changing dynamics of Chinese Economy

Introduction

It might not be an overstatement that Chinese economy is experiencing some serious changes. According to the numbers and figures, China is experiencing a slower growth rate. The Chinese Economy is trying to re-balance the equations along different dimensions. Given the situation, it is important for any investor around the globe to closely analyze the changing dynamics of the economy of China. Generally, because of its size and its overall share of the world’s trade, GDP, development, etc. Investors around the globe need to watch the systematic risks for China.

Role of Central Bank of China

This year, there have been a lot of cash injections into the economy of China. The Central Bank of China has pumped in hundreds of billions of Chinese currency into their financial system through different combinations of short-term, medium-term credit, open market operations and loans to local banks.

Many investors relate to this type of funding as the Chinese style of Quantitative Easing (QE). Investors believe that the Central Bank is taking the tightening measures, not the easing ones. The surprising fact is that it has been like that for years, but only now it has caught the eye of investors around the globe.

Situation at the People’s Bank of China

It is interesting to analyze the position of the People’s Bank of China at this stage. The Bank has experienced positive growth over the years but if we look at their financial statements in the past year, the bank’s growth and development has flattened. The Total assets value, as of June 2015, are pretty much same to their assets value in the last year.

It is an even more eye-opening fact when you learn that the Chinese Central Bank’s financial statement is also assessed as a part of the country’s overall Gross Domestic Product (GDP). This shows how much money in Chinese Yuan the country has supplied or generated relative to the economy of the country.

Monetary supply of China

The monetary base of the country has to keep up with its economy. If it fails to do so, the economy gets constraint on money supply, the credit issuance and the overall economic growth of the country. In case of Chinese Economy, the People’s Bank of China’s balance sheet has added little as a percentage of GDP since the year 2010. That is the exact moment the government felt the pressure to take corrective measures in terms of money supply to control or reverse the issue.

However, we believe it is still not right to term the measures of the central bank as tightening. We might as well call the actions as a loosening policy to cope with the situation.

  • The central bank has cut its benchmark interest rates five times last year.
  • With the help of the above mentioned multiple cash inflows or cash injections in the economic system of the country, the interbank borrowing costs have been lowered.
  • The M2 measure of monetary supply, which includes all the saving deposits and money market funds has grown quicker than the country’s monetary base. It was 11.8% year on year in June for the M2 measure of monetary supply against the 3.2% for the base money.

Conclusion

So, one can say that the overall policy of the country is pretty much ‘leaning against the wind’, because money supply or growth has a momentum of its own in the economy. Now, the question lies, what is the source of financing for the Chinese Economy. Over the years, the Central Bank of China has relied heavily on the external financing. That is one of the reason for the growth experienced in China, as after the year 2000 there was significant boom in the foreign- exchange reserves.

Another positive measure that the government has approved is the buying the local assets to expand its monetary supply. However, many investors question the reluctance of the Chinese Economy to let the Chinese Yuan fall and how long the Chinese economy will be able to sustain their current policies.