Twisted policy-making

China reported GDP growth of 6.9% y/y (real GDP growth) in 3Q 2015. It has been widely commented upon. I have blogged on it too. If the officials in China believe their numbers, then they shoudl not be cutting interest rates to boost economic growth further. As per their numbers, growth rate is slowing but is not too low. They want to restructure their economy. One cannot change the direction of a super-tanker without slowing it down considerably first. So, if one were serious about restructuring and if growth is slowing only gently, where was the need to cut interest rates and the Reserve Requirement Ratio?

Note too that loan growth still exceeds nominal GDP growth. Check out this piece from ‘Economist’. Rate cuts would worsen the problem of debt accumulation.

On top of that, the People’s Bank of China has confirmed that the economy could grow comfortably at 6-7% in the next 3-5 years. Quite clearly, China wants to have it both ways. This is the context in which the IMF is supposed to have assured China that the yuan would enter into the SDR basket. Law of unintended consequences very likely to play out next year.


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